Excluded from bailouts, mortgage agents face cash crunch
WASHINGTON – Federal policymakers have rushed to support almost all corner of the financial system as the coronavirus takes a heavy toll on the US economy. But there is growing concern that a critical corner of the housing industry has been overlooked, putting mortgage companies in a precarious position as millions of borrowers delay payments.
The tension is expected to intensify in the coming weeks, as companies lay off millions of workers who will have no choice but to request hardship waivers or forbearance from their lenders. This could put much of the mortgage industry at risk, as businesses that are not banks, but make loans and take payments, face a challenge. severe liquidity shortage and potential insolvency.
Lawmakers on both sides have begun to warn of an impending crisis and urge Federal Reserve Chairman Jerome H. Powell and Treasury Secretary Steven Mnuchin to take swift action. This month, a bipartisan group of senators warned Mnuchin that $ 100 billion in mortgage payments could be delayed this year and self-employed mortgage managers, whose annual net profits they estimated to be less than $ 10 billion combined, could become insolvent. House Democrats have echoed these concerns.
“Mortgage agents are expected to face increased pressure as millions of homeowners and tenants lose their jobs, are put on leave or have their hours cut, which will prevent them from making mortgage and rent payments,” because of this public health crisis, ”Maxine Waters, Democratic chair of the House financial services committee, and Senator Sherrod Brown, the top Democrat on the Senate banking committee, wrote in a letter this week.
Yet there is little agreement among policymakers on what, if anything, the government should do to help these companies. Mr. Mnuchin, along with Mark Calabria, the head of the Federal Housing Finance Agency, downplayed the risks to the industry. The Fed has made it clear that it is monitoring, but has yet to signal that it is ready to intervene.
As a result, a chicken game has ensued between federal regulators and dozens of mortgage companies that are not affiliated with any bank but play a significant role in sustaining the $ 11 trillion residential mortgage market.
These businesses, which both take out mortgages and collect loan repayments, flourished after the 2008 housing crisis, as the big banks pulled out of what was seen as a risky and expensive business. Today, non-bank mortgage companies, such as Quicken Loans, Freedom Mortgage and Mr. Cooper (formerly Nationstar), account for nearly 60% of all mortgages issued in the United States and handle more than half of the mortgage loans. outstanding mortgages of the country.
This is a cash intensive activity: service agents collect payments from mortgage borrowers and then return them to investors who hold the bonds backed by those loans. When borrowers are granted forbearance and are allowed to stop making mortgage payments, the duty officer has less money at the door. Yet he is still obligated to make payments to investors, as well as pay property taxes and insurance bills on behalf of homeowners. And unlike banks, these companies are not required to have significant financial buffers that would allow them to bear losses.
Nearly three million homeowners have already requested forbearance, according to real estate data company Black Knight, which means 5.5% of all mortgage holders have asked to delay their monthly payments. The industry expects these numbers to increase in the coming months, especially if unemployment continues to soar, as many economists predict.
The result could be a cash crunch in May, as many of those principal and interest payments to bond investors fall due.
“I think there are going to be financial problems ahead because mortgage agents are going to have problems, a lot of the time,” said Barry Eichengreen, an economist at the University of California at Berkeley, who specializes in the Great Depression.
Policymakers have taken important steps to protect the financial system and individuals from economic hardship, including imposing restrictions on foreclosures. A law passed last month allows borrowers with federally guaranteed mortgages – covering the vast majority of home loans – to ask for abstention without penalty for up to one year if they experience financial hardship due to the virus.
But so far, the government has not developed a plan to ensure the financial stability of mortgage agents. Businesses and their lobbyists want a federal lifeline.
“They imposed forbearance,” said Michael Bright, chief executive of the Structured Finance Association, a trade group that supports investors in securitized mortgages and other loans. “It would be like telling restaurants to cook for the unemployed but not paying restaurants to do it.”
The Mortgage Bankers Association lobbied for a loan facility.
“What we really want is a statement from the Fed and the Treasury that they will create such a facility and it will take time to sort out the operational details, but it will be in place when it is needed,” Robert said. D. Broeksmit, President of the Mortgage Bankers Association.
The risk to repairers is well known to regulators, who have consistently cited their fragile business models but have done little to address the vulnerabilities.
As recently as December, the Financial Stability Supervisory Board, headed by Mr. Mnuchin, warned in its annual report that non-bank mortgage companies “could pass risks to the financial system in the event of financial difficulties.”
“The largest non-bank service providers have limited liquidity, often just enough cash and securities held for sale to cover a few months of operating costs and interest. “
Some housing regulators have started expressing concern in 2016 that non-bank mortgage companies operate with less regulatory oversight than banks and may not be financially equipped to withstand an economic crisis. A regulator, the Government National Mortgage Association, or Ginnie Mae, took action last year to force non-bank mortgage companies to raise their capital levels and submit stress tests.
Ginnie Mae is an important regulator in the housing market, as she guarantees payments to bond investors on mortgages underwritten by many non-bank companies. Recently, Ginnie Mae took her own steps to ease concerns in the mortgage market by stating that she would set up a finance vehicle to provide cash advances to mortgage service companies.
But the industry is seeking even wider relief and the pressure has increased on Mr Mnuchin and Mr Calabria, whose agency oversees Fannie Mae and Freddie Mac, two giant government-controlled mortgage finance companies.
Mr Calabria said he was not prepared to accept the “doomsday” predictions of mortgage agents and industry lobbyists.
He said he saw “insane numbers” predicting mortgage agents would need tens of billions of dollars in financial assistance and said he was skeptical that so many homeowners would be asking for mortgage relief. Many people still work from home, he said, and he expects parts of the economy to start reopening this summer.
“Our expectation is that the overwhelming majority of those who agree to abstain will be for two or three months and not 12 months,” he said.
Mr Calabria sparked widespread concern in the mortgage industry two weeks ago when he said he saw no need for Fannie and Freddie to provide additional financial support to mortgage service companies, and in particular non-banking services.
He said his job was to make sure Fannie and Freddie – who were placed under government care at the start of the last financial crisis – have enough money to avoid financial problems this time around. Mr Calabria also said he did not believe the bankruptcy of a single mortgage manager would pose a systemic risk to the financial system.
Mr Mnuchin, who recently set up a task force on non-bank mortgage liquidity, has tried to allay fears that the United States will leave agents to fend for themselves.
“We are going to make sure the market is functioning properly,” he said at a White House briefing last week.
Fed officials, who have took other measures in order to ease tensions in the mortgage market, indicated that they were willing to consider a mortgage agent service. But the institution may be reluctant to put one in place when housing authorities do not want it.
“We are closely monitoring the mortgage services situation,” Powell told the Brookings Institution on April 9. Mortgages are a “key market” that supports households and consumer spending, he said.
If the Fed does more, it would most likely come from the $ 454 billion Congress gave the Fed and the Treasury to set up emergency lending programs. The Fed has earmarked about 40% of those funds for loans and bond purchases that will benefit businesses and state and local governments, but it has been clear more could come.
But a bailout of the mortgage industry would most likely fuel calls for more regulation.
“Policymakers were well aware before this crisis that these companies were vulnerable to shocks, but did nothing to improve their resilience,” said Gregg Gelzinis, senior policy analyst at the left-wing Center for American Progress. “We should only bail them out if we simultaneously institute a stricter regulatory framework for them in the future.”