Mortgage Industry Threatening to Buckle Under Effects of Aid Program

By:
Chris Gaetano
Published Date:
Apr 6, 2020
The mortgage industry is warning that the 180-day mortgage payment deferral contained in the CARES Act could cause mass chaos, as loan servicers currently lack the liquidity to make the program sustainable.

Under the CARES Act, homeowners with a federally backed mortgage loan—provided that they are experiencing hardship due to the global pandemic whether directly or indirectly—can request from the servicer a forbearance on that mortgage loan, regardless of delinquency status. This reprieve may last at least 180 days. During this time, the borrower will accrue no interest, fees or penalties beyond the amounts already scheduled or calculated as if they had made all contractual payments on time and in full.

Borrowers simply have to ask for the forbearance. Upon receiving the request, the servicer—with no additional required documentation other than the borrowers' attestation that they are experiencing pandemic-related hardship—is instructed to provide forbearance under the conditions described above.

A coalition of mortgage industry organizations such as the Mortgage Bankers Association, the National Apartment Association and the Real Estate Roundtable agreed with the general shape of the program, saying the response is an appropriate one, but they warned that "the scale of this forbearance program could not have been foreseen by mortgage servicers, or fully anticipated by regulators."

The coalition therefore called on the government to provide a liquidity facility for single and multifamily home loan servicers to ensure that the industry has the ability to provide economic relief "at the scale and for the duration required."

The big fear, according to the Mortgage Report, is that lenders, themselves, have creditors they must pay. When a homeowner doesn't pay, the loan servicer is still obligated to pay its investors in the securities markets. Therefore, the more people who aren't paying their mortgages, the more that loan servicers will be behind in payments to their investors.

Beyond this, the mortgage industry is also facing an unintended consequence of the Federal Reserve's decision to directly buy up mortgage contracts. The central bank, as part of a suite of recent emergency actions, pledged to begin buying hundreds of billions of dollars worth of mortgage-backed securities. This was meant to drive down interest rates, and it did, but now the mortgage industry is saying this has had the effect of driving tens of millions of dollars worth of margin calls, which happens when the value of an investor's margin account (the one containing securities bought with borrowed money) falls below the broker's required amount, prompting demand from the broker that the investor deposit additional funds to bring the account back up to minimum value.

On the ground, homeowners trying to take advantage of the forbearance program are finding themselves challenged by confusion over its terms as well as the policies of individual lenders, said USA Today. For instance, when people apply for the program at Wells Fargo, the bank is telling them that it will demand the missed payments in one lump sum once the forbearance period is over, which is a difficult thing to consider for those hurt by the economic chaos. Bank of America customers are experiencing similar demands.

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