With the enactment of the $2.2 trillion CARES bill, Congress is providing funds to address the health care response to the coronavirus crisis and to cushion its economic impact. This is being done through a $1,200 check to most Americans and hundreds of billions in loans to provide liquidity to meet consumer and business credit needs.
But there is one gaping hole in the bill and the federal response to date. The CARES bill requires servicers to advance up to a year of borrower payments on government-guaranteed/insured and conforming mortgages to every borrower that requests forbearance and attests to financial hardship caused by coronavirus. But no liquidity support is explicitly being provided to help IMB servicers meet this new responsibility for servicers to cover missed borrower mortgage payments, through what are referred to as advances.
On March 18, the Community Home Lenders Association sent a letter to top mortgage regulators — Treasury Secretary Steve Mnuchin, HUD Secretary Ben Carson and FHFA Director Mark Calabria — calling for swift action on this issue, offering several options including Ginnie Mae making advances. With the adoption of a borrower option for forbearance requirements for up to a year for most mortgage loans, this action is more critical than ever, to avoid overwhelming servicers with new financial responsibilities from the bill and from the coronavirus pandemic.
Therefore, CHLA hopes and believes that federal officials understand the need to act quickly to address this issue. Any such action must be broad-based, eligible to large and small servicers alike, particularly on the 100% advance responsibility that Ginnie Mae issuers have.
Fortunately, as National Mortgage News reported, Treasury Secretary Mnuchin announced that he was forming a task force of regulators to deal with the liquidity shortfall that mortgage servicer firms may soon face.
If this results in some type of liquidity facility to finance servicer advances, it is critical to keep a number of things in mind.
First, this would not be a "bailout." This need does not arise because IMBs are losing money or engaging in risky activity. The need arises because the federal government is essentially requiring IMB servicers to act as bankers to mortgage borrowers that miss payments, and IMBs do not have access to government-backed funds like banks do, such as FDIC-insured deposits or Federal Home Loan Bank advances. With rising unemployment due to coronavirus and new forbearance requirements, it is only reasonable that a credit facility to enable IMB servicers to carry out this banking function is provided.
Second, extending credit to IMBs to meet advance responsibilities is not a particularly risky action. Since the advances are being made on federally insured loans, such as the Federal Housing Administration program, rates of recovery on the loans will very high. Typically, advances are recovered through borrowers resuming payments, loan modifications, or FHA claims. Therefore, risks are very low.
Third, failure to provide credit to IMB servicers would be devastating to consumers. In the aftermath of the last (2008) financial crisis, many banks exited mortgage lending, and IMBs stepped in and now originate over 75% of FHA loans and around half of all mortgage loans.
Failure to act would impact the entire IMBs industry's ability to originate new loans, as their focus turns to the advance problem, compounded by other bottlenecks affecting the loan closing process. Individual lenders that service their own loans are directly affected, both financially and operationally, which could take them out of the mortgage origination market.
But IMBs that don't service their loans would also be adversely affected. Since they sell their loans to aggregators, predominately nonbank servicers, if those aggregators are sidelined, the smallest IMBs will not be able to sell their loans and therefore will not be able to originate the loans to consumers.
All of this occurs at a time when consumers are strapped for cash and mortgage refinances are one of the most important sources of cash and liquidity for individual consumers. The effect is also longer term. As the coronavirus recedes, consumers will need affordable mortgages to buy homes, to avoid the same type of housing market implosion that occurred after the 2008 crisis.
This also comes at a time when borrowers are increasingly missing payments and now have the right to ask for extended forbearance. As this happens, borrowers need servicers to do appropriate and detailed loss mitigation, revising loan terms to accommodate a period of missed payments or salary reductions caused by the coronavirus. If servicers are sidelined by concerns over liquidity over advance responsibilities, borrowers will suffer in terms of receiving these timely loan modifications.
Congress and the federal government are acting swiftly to address the economic damage being done by the coronavirus. Addressing servicer credit for advances must be a part of that response.
