Millions of borrowers may be unable to pay their mortgages as the coronavirus continues to crush the U.S. economy. But there is a government back-up plan. The CARES Act just signed into law allows borrowers to skip payments for up to a year and then have those payments tacked on to the end of their loans.
There's one hitch: the $2 trillion stimulus package states that borrowers need not provide any proof of financial hardship. They can simply say they can't pay.
In an interview Wednesday, the chief regulator of mortgage giants Fannie Mae and Freddie Mac, FHFA Director Mark Calabria, begged borrowers to be honest.
"We're operating on the honor system. We are asking and we're putting together a script for servicers. This is supposed to be limited to if you've lost your job, you've lost income. Please, if you haven't lost your job, continue paying. If you can pay your mortgage please do so because we really need to focus on the people who can't."
There will be some accountability: borrowers will have to provide documentation when they set up their repayment plans. Lying then would be considered fraud, a spokesperson for the FHFA said.
Calabria estimated that up to 2 million borrowers could be applying for loan forbearance by May and said that mortgage servicers, as well as Fannie and Freddie, could handle that if it was just for a few months. After that, there could be problems.
"If this goes beyond two or three months and we start to get worse than that, then that's going to be a lot of strain, and certainly we're going to start to see some firms get into a lot of liquidity trouble," he added.
While the mortgage market was much healthier going into this crisis than it was going into the subprime mortgage crisis, there is still one very vulnerable area: FHA loans. These are low down payment loans to borrowers with lower credit scores, and they are insured by the federal government.
"The truth is that subprime really didn't as much go away as it went into FHA, so you have a lot of FHA borrowers who I think are vulnerable. The real question is the duration of this," Calabria said.
"If this is something that goes on for six months or more, then I think you're going to continue to see a lot of stress, and I would really emphasize the place to look right now is the FHA market, with the credit quality of their borrowers," he said. "They're really going to be the first canary in the coal mine in terms of what the broader implications are going to be."