Policymakers are considering ways to ensure the mortgage servicing industry –– the central plumbing of the U.S. housing financial system –– remains functional during the COVID-19 crisis.
Policies established by various federal housing agencies and augmented in the $2 trillion CARES Act that offer homeowners affected by the crisis forbearance on their monthly mortgage payments could cost the industry $75 billion – $100 billion, according to the Mortgage Bankers Association. This could cause lasting damage to the housing market that will make the coming economic recovery longer and harder.
Any solution to this crisis needs to go beyond temporary forbearance on foreclosures. It must also prevent homeowners who cannot pay their mortgage payments from eventually defaulting and facing complex loan modifications with potentially higher monthly payments, or losing their homes.
The system needs a clean and simple way to protect homeowners, cover the payments they currently are unable to meet, and defer such unpaid amounts at 0% interest until they pay off their mortgages. Such a solution also needs to maintain the financial integrity of the servicing industry and the secondary mortgage market.
The CARES Act creates the opportunity for a fast, efficient, and cost-effective federal program that, in protecting servicers, protects America’s homeowners for the long term.
We envision a program that would create a Federal Reserve funding facility for single-family servicers of Ginnie Mae, Fannie Mae, Freddie Mac and state and local housing finance agency home mortgage portfolios. It would enable up to 6.75 million low- and moderate-income homeowners to avoid default on their mortgages despite layoffs and unemployment due to the pandemic.
Here’s how it would work:
- A Fed commitment of $19.25 billion combined with $16.25 billion in Treasury equity investment of the $425 billion authorized in the stimulus, creates $35 billion of liquidity for regular principal and interest advances on mortgage-backed securities.
- This money is provided through a Federal Reserve facility for mortgage servicers.
- The Fed receives full repayment with interest at 2%; the Treasury investment enables the Fed to provide funding at 0% on behalf of homeowners throughout the country.
- Funding runs through commercial bank intermediaries to servicers to cover the costs they incur each month on behalf of borrowers to make scheduled payments on mortgage-backed securities and bonds and escrow deposits for borrowers’ taxes, homeowners’ insurance, and mortgage insurance.
- Treasury receives up to 75% of its investment back (roughly $12 billion) when borrowers pay off their mortgages. The Treasury’s net investment of approximately $4 billion prevents foreclosure losses on millions of federally insured and guaranteed mortgages, as happened during the financial crisis.
Under the program we envision, targeted federal investment enables borrowers to avoid loan default despite missing up to three monthly payments during their forbearance periods; they simply pay this money back at 0% interest, whenever they pay off their loan.
And the program enables servicers to stay in business and helps keep the housing system intact under highly stressful conditions — and avoid untold amounts in foreclosure losses by the federal housing agencies and GSEs down the line.
If the Presidential emergency lasts longer, the program can be scaled up to cover additional missing monthly payments through larger investments by the Federal Reserve and Treasury.
More details on how the proposed Mortgage Servicer Funding Facility would work are here.