In 30 Seconds of Less …

Servicers Facing Material Liquidity Concerns & Confusion in the Mortgage Market about What’s In and What’s Not in the CAREs Act –

• Things just got a lot messier as the market realizes the impact of the CAREs Act
• 12 to 15M Agency borrowers could ask for forbearance
• With no specific liquidity facilities in place to help servicers (especially, the nonbank servicers), who’s going to pay for this mess?

Unintended Consequences: Despite experts from the Mortgage Industry partnering with lawmakers on the CAREs Act, they were surprised by the missing conditions, the missing facilities, and the lack of guidance regarding the forbearance plans.  All of this noise will make it harder for borrowers to get new loans in the recovery if not addressed quickly.

IN THE WEEDS –

Mortgage Servicing Industry experts worked with lawmakers on the CAREs Act advocating for forbearance plans for agency mortgages based on the anticipated 30% unemployment figures that the Federal Reserve was estimating. (This weekend James Bullard, the president of the St Louis Fed, revised the peak estimate to 32% unemployment.) As previously noted today, some experts are suggesting between 25% to 50% of all U.S. mortgage borrowers could sign up for forbearance. That number could go as high as 62% for Agency 1st lien mortgage borrowers according to the Urban Institute. Why is the number so high? Two reasons: 1) the broad based unemployment and 2) no hardship evidence is needed under the CAREs Act. Borrowers do not have to use cash reserves and other assets as they have in past before getting forbearance.  

So what’s the problem if the industry helped craft the CAREs Act? 

1) It seems the drafting of the forbearance plans goes farther than many in the industry thought as evidence of hardship (a standard condition) was not included. 

2) Many believed a specific line of credit was being written into the CAREs Act to cover the servicing advances for the forbearance plans. (CNBC 4/5) Further, Dave Stevens former Head of FHA and former CEO of the Mortgage Bankers Association, went on record this weekend in a letter saying that Freddie and Fannie have historically positioned it with servicers that they’d create advancing facilities if there was a major credit event. (paraphrased) The industry believes this to be a major credit event and yet there are no advancing facilities (A fancy kind of a loan tied to collateral payments.) (Note: this is a correction from my Deep Dive article which also assumed the facilities were being put in place.) Also, Ginnie Mae made an unprecedented statement last Monday saying they’d provide liquidity specifically to non-bank servicers. In subsequent communication to servicers, they have walked back from that commitment. Regardless of past communications, the industry is now looking to the Head of the Federal Housing Finance Association (FHFA), which oversees Fannie Mae, Freddie Mac, FHA/Ginnie Mae, and the Federal Home Loan Banks, for direct support.  

How much could this really cost? 

The economist Laurie Goodman from the Urban Institute suggested 12M home borrowers or $66B across the entire mortgage industry.  Mark Zandi, the economist for Moody’s, believes it’s more like 15M home buyers.  So the dollars are material but a lot of those mortgages are serviced by bank owned services who can ultimately get liquidity through the bank and the CAREs Act. Regardless, this is not playing out as the industry anticipated nor historically discussed. 

Unintended Consequences –   

A couple analysts down-graded Freddie and Fannie to sell from $2 a share to $1 a share because of the unintended consequences of the CAREs Act. (MarketWatch) Prior to this Health Crisis, both institutions had been working hard to go private again and come out from under the government control.  This is going the wrong direction!

Further, with the burden of forbearance in limbo, servicers and whole loan purchases are looking for ways to return loans back to the originators. It’s a bad flash back to the ‘08 Financial Crisis! As the Industry squabbles over who eats the costs and owns the impaired loans, it only gets harder and harder for the consumer to access credit.

For now, we can only watch and wait. This has the attention of the Federal Reserve as we discussed earlier today.

Remember, #BeTheCalm!!!

Stay Healthy!

Susie