The next financial crisis: A collapse of the mortgage system

Now industry executives and regulators fear that Congress’s generosity to homeowners could wipe out these companies, which could result in investors not being paid and possibly the whole mortgage financing system going bankrupt – a knock-on effect that would make borrowers considerably more difficult on loans to access to buy houses.

Home lobbyists alerted Senate employees of the potential danger, but the sheer scale of the rescue law and focus on communicating other major concerns in the industry – for example, regarding loan change conditions – meant that their warnings in a hurry went unnoticed by the massive To end legislation.

While the final bill provides the Treasury with $ 454 billion to support the Federal Reserve’s emergency loan programs, including for large corporations, despite an industry week’s lobbying effort, there is no obvious obligation to lend to mortgage banks.

“Housing lobbyists had a strong desire that the bill explicitly instruct the Fed and Treasury to use part of this money to fund service advances,” said Michael Bright, CEO of the Structured Finance Association, which represents 370 financial institutions in the bond market .

Now industrial lobbyists are turning to Trump administration officials.

“We have been in constant contact with many parts of the administration to ensure that they understand the urgency of setting up this liquidity facility,” said Bob Broeksmit, president and CEO of the Mortgage Bankers Association, a trading group.

On Thursday, Treasury Secretary Steven Mnuchin said the Financial Stability Oversight Council – a powerful interacting body made up of leading financial regulators – was “particularly focused on the liquidity problems the market may have.” Mnuchin said he has set up a task force to report back to the council on the matter on Monday.

Concerns about liquidity in the mortgage financing system have been increasing for years as mortgage credit companies are increasingly non-banks – which have no bank access to Fed loans or their stringent capital requirements and deposits to which they can draw. The banks that once dominated the business have withdrawn steadily since the collapse of the real estate market in 2008.

Typically, a mortgage company can withstand some non-paying borrowers, but the breadth of the coronavirus pandemic has sparked industry estimates that 25 to 50 percent of borrowers can’t pay.

This “could jeopardize the ability of a mortgage service provider, particularly non-bank service providers, to remain an ongoing company,” the Fed conference chairman Jerome Powell and Mnuchin warned in a letter on March 25.

State regulators wanted to weigh up because “our members are the primary regulators of non-bank service providers,” said Margaret Liu, CSBS senior vice president and deputy general counsel.

If 25 percent of borrowers fail to make their mortgage payments, the industry would need $ 40 billion to cover three months of payment, according to Jay Bray, CEO of service provider Mr. Cooper. Depending on how long the situation lasts, according to Broeksmit, the requirements for servicers could “exceed $ 75 billion and rise well over $ 100 billion.”

And when mortgage companies fail on a broad front, “the system collapses,” said Andrew Jakabovics, vice president of policy development for Enterprise Community Partners, an affordable nonprofit organization.

“The kind of relief that we provided during the foreclosure crisis was all because we wanted to make sure that investors around the world continued to treat US mortgage-backed securities as an incredibly safe investment,” said Jakabovics. “That would have serious consequences for the availability and price of mortgage loans.”

Bright, who previously managed the $ 2 trillion portfolio of state-owned mortgage lender Ginnie Mae, believes the Fed will launch an emergency loan program for the industry.

“Even if this language was not included [in the Senate bill]I think it’s likely that this could be part of it [the Fed’s Term Asset-Backed Loan Facility Program] in the end, ”he said.

Mark Calabria, director of the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, the two government-sponsored mortgage giants that support about half of the country’s $ 11 trillion market, said in a Bloomberg television interview this week He was confident that large banks would continue to lend to mortgage service providers for the time being.

Still, He said, “If we get into a situation that takes longer than two months, there has to be a bigger solution.”

Broeksmit said that some mortgage banks will not make it that long, depending on the percentage of loans in their portfolios in areas of the country where the virus is particularly badly affected.

“Some servicers need liquidity earlier than others, so we hope the facility will be up and running immediately,” said Broeksmit.

Liu also said that bank credit lines would not be enough to keep the system alive.

“The mortgage market is one of the many complex parts of our financial system, so these assurances are really important, but I think the government’s role as a reliable and available source of credit for the mortgage market and mortgage service providers during this period. A crisis is even more important,” she said.

In the meantime, the industry is keeping its fingers crossed that the individual monetary relief in the Senate bill will result in fewer people having to ask for forgiveness in their payments.

“We hope that the acceptance will not be too high and that the duration will not be extended, but we have to prepare for both,” said Broeksmit.

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