Mortgage servicers are lined up to bear the brunt of the CARES Act according to Berkeley Research Group Managing Director Greg Halm on Law360. Halm notes that current legislation provides assistance to some borrowers who do not need help, and it requires the wrong entities, mortgage servicers, to finance a large portion of this assistance.
A secondary source of revenue for servicers comes in the form of interest. When borrowers pay servicers before they are obligated to remit those funds to investors, insurance companies and taxing authorities, servicers can earn interest while they hold the borrower's funds.
However, when borrowers stop making payments on their mortgages, servicers lose this secondary revenue source, but still must pay insurance premiums and property taxes on behalf of borrowers, and also must make principal and interest payments to the investors who own the loans, at least for a period of time.
Under normal circumstances, when a borrower misses a payment, a servicer will contact the borrower to explore the reasons for the missed payment, and it will do what it can to help the borrower get back on track and keep their home. A borrower might also proactively contact the servicer before a payment is missed.
"In summary, the structure of the mortgage assistance program in the CARES Act will tend to increase the proportion of nonperforming loans and cause mortgage servicers to bear the cost," said Halm. "However, unlike the federal government, loan servicers do not have virtually unlimited access to capital."
Given the financial pressure already being placed on servicers, and most acutely nonbank servicers, from such a large wave of delinquency and forbearance, there is a real danger that the CARES Act may have an unintended consequence: It could force servicers to exhaust their finite capital to provide assistance to borrowers with federally backed loans who do not need it, and thereby impair their capacity to provide assistance to other borrowers who do need it, but whose loans are not backed by federal entities.