With the rise in confirmed COVID-19 cases this summer and the uncertainty surrounding the extension of temporary unemployment benefits after the end of this month, housing experts from the Urban Institute suggest we may be on the brink of another “liquidity panic” similar to what we experienced in March.
While loan servicers have weathered the pandemic-induced recession and all that came with it fairly well so far, further pressure would disproportionately impact the government loan market, according to the researchers.
“We recommend the Federal Reserve and the Treasury begin developing a liquidity facility that could be activated quickly to minimize any potential market disruption,” wrote Karan Kaul and Ted Tozer in a brief, “The Need for a Federal Liquidity Facility for Government Loan Servicing.”
While the CARES Act put servicers in a precarious position with its generous mortgage loan forbearance program, servicers have weathered the storm well for several reasons.
Record-low interest rates caused a burst of refinancing activity that bolstered servicers’ liquidity. Also, while millions of borrowers entered forbearance plans, some continued to submit payments regardless. The researchers also suggest that early confusion about how and when borrowers would have to repay the forborne payments perhaps dissuaded some from entering forbearance.
Most importantly, though the GSEs helped servicers by capping their obligation to advance principal, interest, taxes, and insurance on loans in forbearance at four months.
The GSEs are able to do this because they can leverage their corporate resources or issue debt in order to advance funds to their Common Securitization Platform.
On the other hand, Ginnie Mae does not have the flexibility to support its issuers in this manner and to complicate matters further, the loans Ginnie Mae backs are higher risk than GSE loans.
As of the end of June, 6.2% of GSE loans were in forbearance, while 11.2% of Ginnie Mae loans were in forbearance, according to data from the Mortgage Bankers Association.
Ginnie Mae’s role is to serve as a backstop if an issuer becomes insolvent. Its issuers are on the hook for more than the servicers of GSE loans are. Ginnie Mae issuers “are responsible for performing many of the same functions in the government lending space that the GSEs perform in the conventional space,” according to the Urban Institute.
Ginnie Mae created the Pass-Through Assistance Program to cover principal and interest advances in order to help its issuers. However, the issuers are still responsible for taxes, FHA insurance premiums, homeowners’ insurance, and Ginnie Mae’s 6 basis point guarantee fee. Together, these account for about 30% of the average monthly payment, according to the Urban Institute.
Thus, the rise in confirmed COVID-19 cases, financial uncertainty, and the potential for further income loss or restrictions are a particular threat to the government loan sector.
“Ultimately, we conclude that a federal liquidity facility is the only practical solution for mitigating forbearance-related liquidity risks for government loans,” the researchers wrote.