The government is now officially receiving pressure from all sides to create a forbearance liquidity facility for mortgage servicers.
Late last week, a group of Republican members of the House of Representatives called on Department of the Treasury Secretary Steve Mnuchin to aid nonbank servicers that have to advance principal and interest payments to investors on loans that are in forbearance. That effort followed a push from a bipartisan group in the Senate.
Now, two of the top Democrats in Congress are joining the fight. But they’re not alone. The Conference of State Bank Supervisors, which includes the state banking regulators in all 50 states, is also calling on the government to step in and help servicers.
This week, House Financial Services Committee Chair Rep. Maxine Waters, D-CA, and Sen. Sherrod Brown, D-OH, the ranking member on the Senate Committee on Banking, Housing and Urban Affairs, sent a letter to Mnuchin and Federal Reserve Chair Jerome Powell, pressing them to help mortgage servicers.
“We urge you to use your existing authorities to ensure that the housing market, including nonbank servicers, have sufficient liquidity to stabilize the housing market and continue to serve and protect homeowners and renters for the duration of this crisis,” Waters and Brown wrote in the letter.
Those sentiments were echoed by CSBS President and CEO John Ryan, who sent a letter Wednesday to Waters and Brown, along with Senate Committee on Banking, Housing and Urban Affairs Chair Sen. Mike Crapo, R-ID, and Rep. Patrick McHenry, R-NC, the ranking member on the House Financial Services Committee.
In his letter, Ryan, on behalf of the state banking regulators, urged Congress to take action to “ensure the orderly functioning of the U.S. housing market and bring stability and confidence to banks and their business customers.”
Among Ryan’s suggestions are that Congress pass legislation to “address the economic and financial turmoil associated with the COVID-19 pandemic,” including Congressional action to establish a credit facility for nonbank mortgage servicers.
Through their respective letters, Brown, Waters, and the CSBS become the latest to push for a federally backed liquidity facility for servicers to address the increase in forbearance due to the coronavirus.
Ryan noted the CARES Act provisions that established mortgage forbearance as a relief option for struggling borrowers, as well as suspensions on foreclosures and evictions.
“As state officials with consumer protection and financial oversight responsibilities, CSBS’s members strongly support these critical protections at a time when individuals and families are being asked to stay at home to help curb the spread of the coronavirus,” Ryan wrote. “We strongly believe that corresponding actions must follow to support the mortgage servicing sector through this period of mortgage forbearance. To accomplish this, CSBS urges Congress to establish a credit facility for nonbank mortgage servicers to be administered by the Federal Reserve in anticipation of widespread borrower payment forbearance.”
According to Ryan, the CSBS believes that the need for forbearance will be much more widespread than some decision makers, namely Federal Housing Finance Agency Director Mark Calabria, believe.
Last week, Calabria told HousingWire that he believes approximately 3.6% of the GSEs’ portfolio will end up needing forbearance.
Ryan, however, says the government needs to be prepared for forbearance requests to be at least 10 times larger than that.
“If a significant number of borrowers cease making payments for the duration of the COVID-19 pandemic, mortgage servicers will face servicing advance obligations that far exceed those ever experienced or anticipated,” Ryan writes. “Although mortgage servicers maintain liquid assets to ensure they can sustain high levels of servicing advance obligations, it is unlikely that these assets will be sufficient to cover servicing advances when, as is estimated, between one-quarter and one-half of borrowers enter forbearance and suspend payments.”
Ryan also disputes Calabria’s suggestion that moving servicing from struggling smaller entities to larger ones is a sensible alternative to aiding the servicers themselves.
“It has been suggested that one solution to this COVID-created liquidity crisis is to transfer servicing away from mortgage servicers to larger, ‘more reputable’ entities,” Ryan said, directly referencing what Calabria told HousingWire.
“Recent history shows us that entity size is not necessarily correlated with mortgage servicing success or with consumer protection. In the aftermath of the 2008 financial crisis, smaller nonbank servicers stepped in when larger entities and depositories fled the sector or went out of business,” Ryan continued. “Unnecessary additional market dislocation caused by a lack of liquidity would unduly harm vulnerable borrowers and drive otherwise stable companies out of the market.”
In their letter, Waters and Brown urge Mnuchin to act to save nonbank mortgage servicers.
“Mortgage servicers are expected to face increased strain as millions of homeowners and renters lose jobs, are furloughed, or see reduced hours, all of which will keep them from making mortgage and rent payments, as a result of this public health crisis,” Waters and Brown write.
“It is imperative that the Treasury and the Federal Reserve use the authority Congress granted under Title IV of the CARES Act to prepare to meet the needs of vulnerable markets,” they continued. “This includes the housing market, and the needs of nonbank mortgage servicers, which may experience liquidity shortfalls during this time of unprecedented stress.”
Mnuchin, for his part, said earlier this week that the Treasury and Financial Stability Oversight Council is “very aware” of the issue and will “make sure” that the mortgage market continues to function.
But Waters and Brown want definitive action now. “The government must be prepared to respond quickly to prevent a liquidity shortfall in the single-family and multifamily mortgage markets, and to ensure that consumers are equitably served by that response,” they write. “Any liquidity provided must be used to stabilize the market at a time when many families may fall behind on payments and facilitate relief to individual homeowners and renters throughout the market through forbearance, loss mitigation, and protection from displacement, rather than immediate defaults and evictions.”