Coronavirus mortgage relief poses risk to housing industry

A sixth-month pause on certain mortgage payments mandated by the coronavirus economic rescue bill is causing confusion and risking financial peril across the housing industry. 

The $2.2-trillion coronavirus response and stimulus bill signed by President Trump in March gave any homeowner with a mortgage backstopped by the federal government the ability to receive forbearance or delay payments for up to 180 days.

The provision could be a crucial financial lifeline for millions of Americans who’ve lost their jobs due to the pandemic and owe part of a combined $7 trillion in federally backed U.S. mortgages. 

But a lack of clear legal guidelines for what happens after the forbearance period has left some homeowners facing unaffordable balloon payments down the line and the mortgage industry pleading for its own federal financial support.

Some forbearance applicants have been asked to cover several months of delayed mortgage payments soon after the crisis passes, which could leave millions of struggling homeowners saddled with deep debt.

Though major banks say they have enough cash on hand to weather the delays, mortgage servicers that depend on a steady stream of home loan payments to stay afloat are sparring with regulators who’ve shown little urgency to salvage their industry.

“If these companies go bankrupt, no one is going to want that servicing. The big banks don’t want it for the capital requirements and other reputation risk comes with it. Financially, somebody has got to pick that up,” said Mike Calhoun, president of the Center for Responsible Lending, a non-profit that advocates for boosting consumer financial protections.

The consistent payment of mortgages and the system of investment products they fund is a crucial pillar of the U.S. financial sector.

The federal government encourages banks and lenders to offer cheap long-term home loans by buying those mortgages through the Federal National Mortgage Association and Federal Home Loan Mortgage Corporation — better known as Fannie Mae and Freddie Mac.

Buying mortgages from banks and lenders gives firms additional cash to lend and leave them with less risk to keep on their books. To fund those purchases, Fannie Mae and Freddie Mac package some of the mortgages they buy into bonds and sell those mortgage-backed securities to investors. 

That cycle of money flowing from homeowners through mortgage lenders to bondholders collapsed in 2007 with the burst of the housing market inflated by irresponsible home loans, risky Wall Street bets and lax oversight.

More than a decade later, the widespread shutdown of the U.S. economy and scramble to contain the damage posed by the coronavirus poses similar risks.

As banks backed away from the residential mortgage space after the 2007-2008 crisis, firms that focused solely on home loans or processing payments on government-guaranteed mortgages dominated the industry. Advocates for those firms say the prospect of six months of delayed mortgage payments may bankrupt them.

Requests for mortgage forbearance rose nearly 1,900 percent in the final week of March, according to data from the Mortgage Bankers Association (MBA), an industry trade group. 

“Borrowers must repay these funds eventually, but in the interim, mortgage servicers are contractually required to keep making payments to the end investor,” wrote Karan Kaul, senior research associate at the Urban Institute, in a Thursday research paper.

“If unresolved, many servicers will likely experience financial distress, causing insolvencies industrywide. Servicer failures at a time when struggling borrowers need assistance the most will have severe consequences for consumers and the entire housing finance system.”

While banks are required under law to hold higher levels of capital than other financial firms and have access to support the Federal Reserve and other government entities, mortgage servicers lack the same prudential oversight and depend on credit and steady servicing fees to stay afloat.

The MBA and other industry advocates have implored the Federal Reserve to set up a credit facility that would allow mortgage servicers take discounted loans to pay bondholders what they’re owed from the missed mortgage payments.

Fed Chairman Jerome Powell said Thursday that the Fed would keep close watch on issues facing mortgage servicers, but passed on whether the central bank would extend its emergency lending powers to the industry.

The director of the Federal Housing Finance Agency, which oversees Fannie and Freddie, has also dismissed the need for a federal intervention into the mortgage market at this point.

“I’ve seen zero [evidence] to suggest that there’s a systemic crisis across the nonbank servicers,” FHFA Director Mark Calabria told the Wall Street Journal in an interview this week. 

“If this goes on for a year, maybe. But I think the frustration here is a lot of just misrepresentation.”

The MBA called Calabria’s comments a “a troubling message to borrowers, lenders, and the mortgage market” that “only reinforces” the need for a Fed credit facility for mortgage lenders.

Consumer advocates have also grown deeply concerned about the potential costs for homeowners if major firms within the mortgage industry crumble or face an urgent need for missed payments.

“We believe it’s already discouraging servicers from offering the forbearance that people are entitled to and they need,” Calhoun said. “They need to have set this up weeks ago and it’s just causing additional harm every day that it’s in wait.”