While the CARES Act let millions of homeowners off the hook for mortgage payments during the COVID-19 pandemic, it placed servicers in the position of having to advance payments on behalf of the millions of borrowers who took up the forbearance offer this spring. The Federal Housing Finance Agency (FHFA) then stepped in to help servicers, capping their repayment obligations at four months.
However, servicers are not the only ones vulnerable to the effects of unpaid mortgage loans, and another impacted group is calling for FHFA to save them from financial harm as well.
Credit Risk Transfer (CRT) securities, which allow private investors to absorb some of the risks of Fannie Mae and Freddie Mac in order to shield taxpayers, are now vulnerable to losses while mortgages go unpaid in the short term. Some investors are calling on the FHFA to protect them from such losses, while others say the risk was part of the deal, according to a report by Bloomberg. 
Investors in the GSEs’ credit risk transfer securities could lose billions due to the forbearances allowed in the federal CARES Act, Bloomberg reported.
Some investors have reportedly reached out to FHFA Director Mark Calabria on the issue but thus far have not received a response.
Representatives from Franklin Resources and AllianceBernstein Holding LP spoke to Bloomberg, expressing their disapproval of the current situation.
“This is not supposed to be a transaction where Fannie and Freddie walk away with a windfall and do not have losses,” Michael Canter, Director of Securitized Assets and U.S. Multisector Fixed Income at AllianceBernstein told Bloomberg. He said this would be “contrary to the spirit of the economic arrangement.”
Similarly, Paul Varunok, a portfolio manager at Franklin Templeton told Bloomberg that “it is indeed possible that investors take losses while the GSEs could potentially profit.”
Mirroring Canter’s comments, he added, “We do not believe this was in the spirit in which the program was incepted.”
According to Bloomberg, some bondholders are already threatening to stop buying CRT securities.
However, some feel that if Fannie Mae and Freddie Mac save the investors who signed up to absorb some of their risk, it would defeat the purpose of the program.
“If they face losses that are ultimately absorbed by Fannie and Freddie, it would undermine the purpose of issuing CRT securities in the first place, said Douglas Holtz-Eakin, president of the American Action Forum,” according to Bloomberg.
He reportedly told Bloomberg, “It was a valid contract, and they should adhere to it.”
“A lot of investors were hurt in a lot of ways by the CARES Act. There’s nothing special about these guys,” he added.
The Mortgage Bankers Association (MBA)  reported that the total number of loans in forbearance fell by 38 basis points to 7.8% for the week ending on July 12, 2020. The MBA estimated that 3.9 million homeowners are still in forbearance plans.
The MBA’s prior report found 8.18% of loans were in forbearance. Its latest survey covers the period from July 6 through July 12 and represents 75% of the mortgage market or 37.3 million loans.