In a new report published by the Harvard Joint Center for Housing Studies (JCHS), former Freddie Mac CEO Don Layton discussed the question of servicer finances during the COVID-19 pandemic.
According to Layton, mortgage servicers and government representatives have “fundamentally different views of how the government takes extraordinary actions in times of extraordinary stress to ‘rescue’ industries and markets for the greater good.” As Layton explains, tensions are high because “the survival of hundreds of companies in the mortgage industry is believed to be at risk, along with major disruption to the country’s housing finance system if they fail.”
Under the recently signed CARES Act, borrowers do not need to show any proof of financial hardship in order to skip payments for up to a year. Layton notes that, given the economic downturn, the industry has assumed that forbearances like this could apply to an “unprecedented” 25% of all mortgages
According to Layton, a large uptick in forbearance assistance through the CARES Act would generate the requirement that servicers advance funds to MBS investors in amounts far beyond what was contemplated when the forbearance program was developed in 2017-18. He estimates that it totals in the tens of billions of dollars, depending upon how long and deep the economic downturn is, as well as how much lost household income the government replaces via various programs.
Non-bank servicers could be especially impacted, as they do not have the liquidity reserves that banks typically do. In response, the industry is proposing a line of credit at the Federal Reserve where servicers can borrow the funds needed to make the required advances. Layton cites Ginnie Mae’s recent announcement that it is beginning to implement a program to cover the advances on principal and interest payments being made by non-bank servicers.
Layton proposes two paths for resolution, including implementing the GSE programs for sub-servicing or servicing transfer, and having the administration to change its strategy and agree to the Federal Reserve line of credit alternative, but with the addition of usual extraordinary-action policy restrictions rather than the hold-harmless proposal of the industry.
Taking one of these routes, Layton notes, may lead to a remedy “in relatively short order."