Warner urging action to avoid housing crisis

U.S. Sen. Mark Warner is leading a call for the Financial Stability Oversight Council to action to avoid an impending crisis in the housing finance system due to the economic fallout of the novel COVID-19 outbreak.

In a letter to Sec. Steven T. Mnuchin, a group of senators led by Warner asked the FSOC to help avert instability in the broader mortgage market by providing temporary liquidity to mortgage servicers.

Many servicers face an impending cash crunch as more Americans affected by the COVID-19 crisis are forced to seek economic assistance on their mortgages due to economic damage and job loss caused by the health crisis.

“Given the magnitude of the economic stress that many Americans will face as a result of the virus, and the early numbers we are seeing from lenders across the country, it is likely that many families will be unable to make their payments as scheduled, triggering widespread participation in the program, with potentially up to 25% of borrowers seeking assistance. While this is a reminder of the program’s importance, it also presents a challenge,” wrote the lawmakers, who also pointed out that servicers could see as much as $100 billion in mortgage payments forborne. “To put this in perspective, according to Moody’s Analytics, last year servicers had total net profits of less than $10 billion.  The institutions that normally provide servicers with their liquidity will be unwilling to provide this unprecedented level of support, at least at a rate that many servicers could possibly afford.  This will leave many servicers with no way to cover the growing obligations.  Since this liquidity need was created by the CARES Act’s entirely appropriate, but extraordinary, requirement to provide widespread forbearance, measures should be taken to ensure that the businesses required to execute on that commitment can survive to see it through.”

The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides much-needed protections for homeowners, allowing any homeowner experiencing financial hardship to receive up to 6 months’ forbearance on their mortgage payments, as long as their mortgage is insured or guaranteed by the federal government.

Up to 25 percent of borrowers are expected to rely on this program, leaving mortgage servicers with the responsibility of paying investors on behalf of borrowers.

In their letter, the senators emphasized that non-bank mortgage servicers – which currently account for half of the $7 trillion market for agency mortgages – will likely be unable to remain solvent in the near future due to limited liquidity, and the repercussions of their collapse will severely affect homeowners and the broader mortgage market.

“While we understand that some nonbank lenders may have adopted practices that made them particularly susceptible to constraints on their liquidity during a severe downturn, imposing a broad liquidity shock to the entire servicing sector is not the way to go about reform,” the letter continued.

Noting the systemic consequences of allowing mortgage servicers to fail – which include the devaluation of mortgage servicing rights (MSRs), the subsequent financial deterioration of healthy nonbank lenders and the skyrocketing costs and risks associated with providing mortgages in the future – the senators urged the Sec. Mnuchin, the FHFA and the GSES to work through FSOC to take action in order to ensure that the unfolding crisis does as little damage to the economy as possible.