What advice do you have for homeowners with mortgage payments due who have either lost their jobs, maybe had their hours reduced, or expect to be laid off in the upcoming days?
There are programs available to you—namely forbearance as well as flexibility from banks. While getting in touch with your lender or servicer may be more difficult at the moment given the magnitude of requests, now is the time to reach out if you are in immediate need.
As Americans are being asked—and in some states, ordered by their elected officials—to stay at home to prevent new COVID-19 infections, what role should the government play in ensuring that they have a home to stay in?
The government touches most of the mortgage market, either directly through government-backed insurers—Fannie, Freddie, and Ginnie—or indirectly through government-regulated banks. Taxpayers ultimately back these loans. The worst outcome for everyone would be a foreclosure crisis, in which those who have lost their jobs also lose their houses. This would result in a steep decline in house prices and could decimate the financial system, requiring bailouts that dwarf those after the 2008 Great Recession. It’s an outcome that we need to—and can—avoid. Government, through the mortgage system, must play a pivotal role in keeping people in their homes.
What does forbearance mean? Is the mortgage payment due forgiven or deferred?
The recently legislated CARES package directs lenders to offer forbearance upon request for government-backed loans for up to six months—with the potential to extend for another six months —with no need to prove hardship. These include all agency-backed loans (Fannie, Freddie, and Ginnie), which make up more than 60% of mortgages outstanding. If you’re not sure whether your loan is government-backed, you should call your lender and find out. The loan repayment is not forgiven but deferred. Details are not set in stone—there are ongoing discussions around whether the deferred payment will be due at the end of the loan term, or upon sale, or whether a more formal loan modification process will be required after the six months is up.
We’ve spoken about homeowners, what are your suggestions for renters in this situation?
For renters living in multifamily properties financed by agency debt, about a third of all apartments and a much higher share of large, 50-plus unit properties, the agencies have offered forbearance if landlords agree to no evictions. So check with your landlord what options that are available to you.
You have stated that the government has told borrowers that they may ask for forbearance. Who will pay lenders for the lost revenues?
Ultimately, the taxpayer will pay, but right now mortgage servicers must remunerate investors funding the mortgage loans. Most loans backed by government agencies are now serviced by relatively small nonbanks. In the aftermath of the subprime crisis, the large banks stepped back from this business.
As servicers, the nonbanks are obligated to make principal and interest payments to bondholders and tax payments to local governments. Although Ginnie and Fannie and Freddie guarantee the bonds and ultimately need to reimburse servicers, a large spike in forbearance requests could create liquidity crunches for these institutions, in addition to simply overwhelming their administrative capacity. As a result, some nonbanks are under financial stress.
In response to this problem, Ginnie Mae set up a liquidity facility for its servicers. There are discussions that a separate facility may be created for Fannie and Freddie. The head of the Federal Housing Finance Agency, which oversees the GSEs (government-sponsored enterprise), Mark Calabria, has indicated that he does not expect forbearance requests to exceed 4-5%, and as such, does not see the need for a separate liquidity facility for Fannie and Freddie. However, the Mortgage Bankers Association has predicted that, by May or June, forbearance requests could quickly surge to 25%, translating to a monthly gap of $12 billion. The chairman of the Federal Reserve Board stated on April 9 that the Fed will be monitoring this closely. Stay tuned.
