Following the recession in 2008, the housing industry faced numerous regulatory changes. Today, as a different economic crisis evolves, some may begin to wonder what the long-term impact on the housing industry will be. As the federal government injects the economy with its sweeping stimulus plan, some believe that government aid to the housing industry should come with major strings attached.
As MReport recently reported [1], the $2 trillion stimulus plan, which allows homeowners two postpone mortgage payments, puts mortgage servicers in a precarious situation. They will not be receiving payments from a broad swath of homeowners, but their immediate obligations to investors remain.
The forbearance program put in place by the government will require tens of billions of dollars to continue paying investors without principal and interest payments coming in, according to Don Layton [2], Senior Industry Fellow at Harvard University’s Joint Center for Housing Studies and former CEO of Freddie Mac.
Layton believes that “extraordinary support actions by the federal government, where specific institutions or categories of institutions are rescued” should come with “penalties and forced business model changes.”
In the case of servicers, Layton says those that are part of banks can probably survive the current situation, but “it is clearly unsustainable” for nonbank mortgage services, which currently account for about half of all agency mortgages.
Layton said the industry has already been aware of nonbanks’ risk exposure.
“Simply put, the mortgage servicing business model needs to be changed,” Layton says. He suggests servicer compensation be changed to a fee-for-transaction rather than a fixed percentage.
He also said a new system needs to be developed to deal with advances, perhaps even one that requires MBS investors to accept late payments “at times.”
Mortgage servicing is, of course, not the only part of the housing industry impacted by the current economic crisis and stimulus plan, and Layton lays out ideas for several.
For the agency MBS markets, which Layton says have “gone to historically low levels of liquidity,” the outcome might be that the government might require “tightening up allowed leverage or minimum liquidity requirements” for agency MBS investors.
For the moment the six private mortgage insurers are not under immediate threat, but Layton says, it is possible that stress will increase at these firms. In this case, Layton says, “the public policy should be for taxpayers to only rescue as many as needed to keep high LTV loan flow going.” His opinion is that only three or four are needed.
“Longer term, the ongoing business model of the PMIs needs revision, period,” Layton says.
As for real estate investment trusts (REITs), Layton says the end outcome will likely be new regulations on maximum leverage and minimum liquidity.
Some impacts of the current economic crisis may not be immediately evident. It may even take years to determine the full amount of credit losses, but eventually it will become evident how well suited the current risk levels at the GSEs, the FHA and VA, and commercial banks are to weather an economic crisis.
If any of these institutions suffer major losses, Layton says the eventual outcome could be a revised business model. In the case of the banks, “bank regulators may need to directly intervene in the construction of their credit box” and some institutions “may even need rescues that would mimic the TARP program.”
So far, Layton seemingly approves of the government’s reaction to the current economic situation, saying, “To date, in my view, the government has moved quickly and reasonably competently in addressing the financial market stresses of the pandemic, fortunately having a well-developed set of tools from the 2008 financial crisis to pull down from its shelves and implement very quickly.”