For the last several weeks, the mortgage servicing industry has been crying out for help, lobbying the government to set up a federally backed liquidity facility for servicers to address the rapid rise in forbearance due to the coronavirus.
Now, the Federal Housing Finance Agency is moving to help servicers who collect payments on loans backed by Fannie Mae and Freddie Mac, but not in the exact way that servicers were expecting.
Rather than setting up a liquidity facility, which would help servicers cover the principal and interest payments they are required to send investors on loans that are in forbearance, the FHFA is changing Fannie and Freddie’s policies to limit the number of payments servicers will be required to make.
Under the new policy, servicers will only be required to advance four months of missed payments for loans in forbearance. After that, the servicer is under “no further obligation to advance scheduled payments.”
According to the FHFA, this policy applies to all GSE servicers, whether they are banks or nonbanks.
“The four-month servicer advance obligation limit for loans in forbearance provides stability and clarity to the $5 trillion Enterprise-backed housing finance market,” FHFA Director Mark Calabria said in a statement. “Mortgage servicers can now plan for exactly how long they will need to advance principal and interest payments on loans for which borrowers have not made their monthly payment.”
According to the FHFA, the change actually aligns Fannie Mae’s policies with ones that Freddie Mac already had in place.
Here’s how the FHFA describes the change:
When a mortgage loan is in a Mortgage-Backed Security (MBS), Fannie Mae servicers with a scheduled payment remittance are responsible for advancing the principal and interest payment regardless of borrower payments. Freddie Mac servicers, who are generally responsible for advancing scheduled interest, are only obligated to advance four months of missed borrower interest payments. Today’s instruction establishes a four-month advance obligation limit for Fannie Mae scheduled servicing for loans and servicers which is consistent with the current policy at Freddie Mac.
Beyond that change, the FHFA is also changing the GSEs’ policies around buying delinquent loans out of mortgage-backed securities.
Under the GSEs’ current policies, mortgages that are delinquent for more than four months are purchased out of MBS pools by the GSEs.
But, under the new policy, the GSEs will keep loans in forbearance in their respective MBS pools “for at least the duration of the forbearance plan.”
According to the FHFA, the change to the MBS buyback policy “clarifies that mortgage loans with COVID-19 payment forbearance shall be treated like a natural disaster event and will remain in the MBS pool.”
The FHFA said that this change “reduces the potential liquidity demands on the Enterprises resulting from loans in COVID-19 forbearance and delinquent loans.”
In a statement, the FHFA said that both it and the GSEs will “continue to monitor the impact of the coronavirus national emergency on the housing finance market” and will update their policies “as necessary.”
The Mortgage Bankers Association welcomed the change but reiterated its call for a liquidity facility.
“MBA welcomes today’s announcement from FHFA that caps mortgage servicers’ advancing obligations at four months for Fannie Mae single-family loans, effectively mirroring Freddie Mac’s requirements,” MBA President and CEO Bob Broeksmit said in a statement.
“This is an important step in reducing the maximum liquidity demands for servicers who are providing mortgage payment forbearance for borrowers who have a pandemic-related hardship, and we appreciate FHFA’s action,” Broeksmit added. “While this news reduces servicers’ worst-case cash flow demands considerably, we continue to stress the need for Treasury and the Federal Reserve to create a liquidity facility for those servicers who need it in order to continue to make payments to investors, municipalities, and insurers on behalf of borrowers who have been granted forbearance required under the CARES Act.”
Those sentiments were echoed by Michael Bright, the CEO of the Structured Finance Association.
“This is a very welcome development and aligns the GSEs responsibilities under the COVID-19 forbearance program with their normal responsibilities as guarantors of the loans,” Bright said in a statement. “This will provide some needed relief and certainty. I am glad the FHFA is taking these steps, and I hope that FHFA, Treasury, and the Federal Reserve will monitor the uptake rate of this program and provide additional liquidity assistance if it becomes necessary as this economic crisis continues.”
[Update: This article is updated with a statement from the Mortgage Bankers Association and the Structured Finance Association..]