- The Cares Act mandates that all borrowers with government-backed mortgages be allowed to delay at least 90 days of monthly payments and possibly up to a year's worth.
- Servicers are granting the payment deferrals to borrowers with no questions asked, as is required by the law, but the servicers still have to pay mortgage bond holders.
- "It's frankly frustrating and ridiculous that we do not have a solution in place," said Jay Bray, CEO of the nation's largest nonbank mortgage servicer, Mr. Cooper. "There is going to be complete chaos."
A broad coalition of mortgage and finance industry leaders on Saturday sent a plea to federal regulators, asking for desperately needed cash to keep the mortgage system running during the coronavirus pandemic, as requests from borrowers for the federal mortgage forbearance program are pouring in at an alarming rate.
The Cares Act, which seeks to limit the economic damage from COVID-19, mandates that all borrowers with government-backed mortgages — about 62% of all first lien mortgages according to Urban Institute — be allowed to delay at least 90 days of monthly payments and possibly up to a year's worth.
Those payments would then have to be made at a later time through a payment plan. Servicers are granting the payment deferrals to borrowers with no questions asked, as is required by the law, but the servicers still have to pay mortgage bond holders.
In normal times, they have enough to cover these payments, and, in fact, at the end of last year the mortgage delinquency rate was near a record low, according to CoreLogic. Now that rate is skyrocketing, and servicers do not have nearly enough cash to cover those payments to bondholders.
The coalition, which includes the Mortgage Bankers Association, the National Association of Home Builders, the National Association of Realtors, the Independent Community Bankers of America, U.S. Mortgage Insurers and the National Apartment Association, issued a press release Saturday saying, "The scale of this forbearance program could not have been foreseen by mortgage servicers, or fully anticipated by regulators ... it is therefore incumbent upon the government to provide a liquidity facility for single-family and multifamily servicers ... any further delay could lead to greater uncertainty and volatility in the market."
Mr. Cooper, the largest nonbank servicer in the nation, with close to 4 million mostly government-backed loans has already granted more than 80,000 forbearances, and the requests keep flooding in. Jay Bray, Mr. Cooper's CEO, helped federal regulators set up the plan. He said he was told there would be federal cash for servicers, but that part of the deal never made it to the final act.
"It's frankly frustrating and ridiculous that we do not have a solution in place," said Bray. "There is going to be complete chaos. We're the largest nonbank. We have a strong balance sheet, but for the industry as a whole you're going to start seeing problems soon."
In an interview Wednesday on CNBC, Mark Calabria, director of the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, said he estimated about 2 million borrowers would seek forbearance by May. He did not agree that servicers need liquidity now, only later.
"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," Calabria said.
Others, however, have much higher estimates for the forbearance program. Laurie Goodman, co-director of the Housing Finance Policy Center at Urban Institute, predicted a worst-case scenario of nearly 12 million borrowers receiving some kind of forbearance at a cost of $66 billion for six months. Mark Zandi, chief economist at Moody's Analytics, predicted about 15 million households would receive some forbearance on their home loans.
"We had a tremendous surge in April, you're going to see another massive surge in the middle of the month when they [borrowers] are considered late, and another massive surge in May," said Bray. "They're going to need these forbearance plans, and it's going to continue to grow at a pace that, frankly, some people don't understand and are dismissing how big a problem it's going to be."
Even as Americans begin to receive checks from the government, there is no guarantee they will use that money to pay their mortgages. The forbearance program forbids servicers from asking for any proof of hardship. Bray said that was the right course.
"I do not believe it is a moral hazard. It's not a payment forgiveness plan. Let's say it's three month, at the end of that time they can repay, go onto partial payment, or go into some type of modification, and then there will be some kind of documentation required," said Bray.
But others disagree.
"Throwing this out there without showing evidence of hardship was an outrageous move, outrageous," said David Stevens, who headed the Federal Housing Administration during the subprime mortgage crisis and is a former CEO of the Mortgage Bankers Association. "The administration made a huge mistake bringing moral hazard in and thrust extraordinary risk into the private sector that could collapse the mortgage market."
Stevens said borrowers should have been required to show at least some proof of hardship, which they had to do during subprime mortgage bailout. Moral hazard aside, he, too, contended a liquidity facility for servicers is essential.
"This is a crisis so easily correctable," he said. "The GSEs [Fannie Mae and Freddie Mac] for years have always assured the servicing community that in the event of a major credit event, they'll be there to make sure they provide the liquidity. From what we are hearing, and we can't verify it, the FHFA director instructed the GSEs not to set up a liquidity or advance facility."
When asked for a response to the industry plea, Calabria on Monday declined to comment.
Both Stevens and Bray said that because of this new and momentous risk in the mortgage market, it is suddenly much harder for borrowers to get new loans or refinance current mortgages. Wells Fargo is already placing restrictions on jumbo lending to its customers.
"It's just going to create more fear within the nonbank servicing sector. The banks that service them are going to start to not lend," said Bray. "Ultimately that impacts homeowners. They won't be able to be served because these companies will be in the middle of a crisis. We've seen a lot of businesses close their doors, and if you start closing the doors of servicers you're impacting people's lives much more than other sectors. You're talking about their homes. It's the largest asset they have."