The U.S. housing regulator on Tuesday provided some long-awaited relief for mortgage firms facing billions of dollars of missed home loan repayments, although industry officials said more liquidity assistance was needed.
The Federal Housing Finance Agency said it would cap the number of payments mortgage companies must advance to investors in some government-backed mortgage bonds after weeks of lobbying by industry groups warning of a brewing crisis.
“While this news reduces servicers’ worst-case cash flow demands considerably, we continue to stress the need for Treasury and the Federal Reserve to create a liquidity facility,” the Mortgage Bankers Association (MBA) said.
On Monday, the MBA said the proportion of mortgage servicer portfolios in forbearance had more than doubled from the prior week to 5.95%, as millions of Americans struggling with job losses caused by the novel coronavirus disruption sought to delay monthly payments.
In an interview, the MBA’s Chief Executive Officer Bob Broeksmit said that data showed a “pronounced ramp-up” which is likely to continue.
“Nobody knows how long this will go or what the ultimate take-up rate will be,” he said.
Talks over a broader U.S. emergency liquidity facility to help mortgage firms make payments to investors have been bogged down by clashing views over the severity of the problem, according to three people with knowledge of the talks.
The MBA and other industry officials have said a potential 25% forbearance rate over nine months could leave mortgage servicers with a liquidity shortfall of up to $100 billion.
While the FHFA’s rule-change will reduce that burden by limiting the time that a servicer would need to advance principal and interest payments to bondholders, they remain on the hook for some property taxes, homeowners insurance, and mortgage insurance payments, the MBA said.
The Federal Reserve is willing to create a facility if the U.S. Treasury approves one, but some Treasury and FHFA officials are skeptical that the forbearance rate will get that high.
Some officials also question whether such a liquidity shortfall is a systemic risk, and believe servicers could tap bank lines or merge with stronger rivals if they get into trouble, the sources said.
“No one wants a big servicer to file for bankruptcy and not service. The question is: how big is the risk of that? How much cushion do they have? There isn’t agreement on that,” said one regulatory official.
There is also a debate over conditions of any facility, including which collateral would be acceptable in return for the cash to ensure the Fed does not lose money, he said.
“There’s this whole constellation of federal agencies that at some level need to be coordinated on the response,” said Edward DeMarco, president of the Housing Policy Council trade group and a former director of the FHFA.
Some officials also believe a lack of federal regulation allowed some non-bank mortgage servicers which are generally regulated at a state level, to take on too much risk. These people favor requiring additional oversight, officials said.
The Fed and Treasury declined to comment, but both Chair Jay Powell and Secretary Mnuchin have said they are aware of the issues and are watching the market. A spokesman for the FHFA did not immediately respond to a request for comment.