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Pandemic Reveals Weak Spots in Housing Finance

residential segregation in housingOver the past couple of months, as the COVID-19 pandemic disrupted normal life for Americans across the country, we began to see the first ripples of disturbance to the housing and mortgage markets. Today, we are beginning to see those ripples develop into greater waves with the potential to leave widespread and long-lasting impacts. However, certain areas of the market appear less vulnerable than others.

Home listings have been slashed to nearly half of what they were before the pandemic, homebuilders are quickly shifting course, and mortgage credit appears to be drying up.

“When the COVID-19 crisis struck in full force in March, the housing and mortgage markets were in as good a place as they had been since the early 2000s,” wrote four housing market experts at the Urban Institute in a research paper titled, “The Mortgage Market Has Caught the Virus.”

However, “These strong conditions have been upended with the COVID-19 crisis,” they said.

In the housing finance market, uncertainty means risk, and risk is either taken on at a higher price or avoided altogether. Currently, investors “in every corner of the mortgage market are pulling back aggressively on their exposure to credit risk,” the paper stated.

Over the past decade, the mortgage market has seen growth in non-agency loans and the debut of the GSEs’ credit risk transfer (CRT) market. Both of these sectors are on shaky ground right now.

“All told, we are on course to undermine much of the mortgage ecosystem that has developed over the last decade,” said the researchers.

However, there are areas of the market that remain on more stable ground amid today’s market stress, and those, the researchers point out, are the areas of the market backed by the government.

Thus the researchers advocate the government play a more active role in the housing finance market on a permanent basis.

“While a global pandemic is hopefully anomalous, that the mortgage market has run ashore twice in just over a decade should give us pause,” they wrote, adding that perhaps leaving major portions of the housing market unsupported by the government may be “unhelpful and perhaps simply illusory.”

Instead of waiting for a crisis to hit and then scrambling to find a way for the government to provide necessary support, we should simply “acknowledge that government support will be needed in a time of crisis, and plan and pay for it.”

The researchers also laid out a few short-term solutions to today’s market woes.

One is for the Federal Reserve to provide support to servicers in the form of a lending facility. While millions of homeowners are relieved to have their loans in forbearance during this time, servicers are left on the hook with significant costs that the government has only partially mitigated for them.

Nonbank mortgage servicers are at risk, and with a significant footprint in today’s market, instability and failure in this sector could have major implications for the market, especially for low-income and minority borrowers, the researchers stated.

In the CRT market, the FHFA should first assure investors that loans in COVID-19-related forbearance will not be qualified as delinquent. They should also purchase some “modest amount of CRT securities” to help stabilize the market, according to the research paper.

The non-agency market should be approached delicately, but the researchers did offer two suggestions: expand the Federal Reserve’s Term Asset-Backed Lending Facility to help boost non-agency securitization and reinstate the Treasury’s Public-Private Investment Program to provide equity matching investments for non-agency mortgage-backed securities.

About Author: Krista F. Brock

Krista Franks Brock is a professional writer and editor who has covered the mortgage banking and default servicing sectors since 2011. Previously, she served as managing editor of DS News and Southern Distinction, a regional lifestyle publication. Her work has appeared in a variety of print and online publications, including Consumers Digest, Dallas Style and Design, DS News and DSNews.com, MReport and theMReport.com. She holds degrees in journalism and art from the University of Georgia.

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