Coronavirus and housing: A mortgage crisis is brewing

The 2008 financial crisis was caused by homeowners’ massive default on their mortgages using risky credit products that were doomed to fail. As a result, the bonds in which these mortgages were bundled lost value, dragging down the entire financial system.

With the stock markets falling and unemployment skyrocketing, is the economic fallout from COVID-19 about to cause history to repeat?

Earlier in March, the Federal Housing Finance Agency (FHFA), which regulates mortgage facilitators Fannie Mae and Freddie Mac, asked mortgage services Fannie and Freddie to offer mortgage forbearance or payments. reduced to homeowners affected by the novel coronavirus.

While a separate FHFA directive imposed a moratorium on foreclosures and evictions of homeowners whose mortgages belong to Fannie or Freddie, the potential fallout on the financial system has yet to be addressed. Mortgage bonds are still going to hedge funds, pension funds and elsewhere.

What happens this time around when mortgage payments stop flowing into mortgage bonds?

“I think the scary thing about it is what the latest recession has taught us is how closely linked the financial markets are,” says Patrick Boyaggi, CEO of Own Up Mortgage Market . “You just don’t see something like this happening and there won’t be a ripple effect throughout the economy.”

Homeowners are protected by FHFA guidelines. Mortgage agents – the companies that collect payments from borrowers and make payment to mortgage bond investors – are still required to pay investors, even if borrowers stop paying. The company that handles the payments can vary; it is either the bank or lender that issued the mortgage, or a separate company that specializes in managing mortgage loans. Among these banks are the largest in the country: Citi, JPMorgan Chase, Wells Fargo.

If Congress and regulators don’t step in – and quickly – some mortgage services, banks and lenders will have to dip into capital reserves that are insufficient to cover these payments over the long term. Some will have to close completely, at least temporarily.

If the mortgage agents fail, there is no one there to collect the mortgage payments and pay the money to the mortgage bond investors. The entire mortgage infrastructure would collapse and investors would hold potentially worthless mortgage bonds. Banks that handle loans and / or hold mortgage bonds are said to be strapped for cash as they typically lend to homeowners.

The contagion this would cause in the financial system is impossible to know, but it could potentially be devastating. Mortgages could stop. Pension funds could take another blow. This could make the economic recovery after the pandemic even longer.

The good news is that federal regulators and lawmakers are aware of the problem and are working to fix it. Ginnie Mae, who mainly deals with affordable mortgages, has announced plans to fix the issue within the next two weeks. The Federal Reserve has already bought $ 214 billion worth of mortgage bonds in hopes of stabilizing the market. Wording to address this issue was included in the House relief bill that passed on Friday, but it was not incorporated into the final bill.

The other good news is that this is a fairly straightforward cash flow problem. Mortgage agents need cash to make payments to mortgage bond investors, but they are not receiving this money due to the FHFA’s mortgage forbearance directive. The solution proposed in the House relief bill was for the Federal Reserve to extend a line of credit to mortgage agents to cover their short-term cash flow problem.

“[Regulators and lawmakers] are aware of the problem and I think there is generally a consensus on the path of least resistance on some of these issues, but it has to happen, ”says Andrew Jakabovics, vice president of policy development at Enterprise Community Partners. “That’s where we are at the moment, until it becomes official, that clarity and that certainty.”

The bad news is that federal regulators and industry are arguing over the appropriate response. Service agents want a line of credit to keep making payments. Mark Calabria, director of the FHFA, wants to transfer the service rights of distressed repairers to “other parties”, and even called the industry alarm on the situation “turned”.

The economic fallout from COVID-19 has caused similar and equally catastrophic problems for virtually every industry in America, and they are all pushing for their solution to be written into what will undoubtedly be more of the back-up plans adopted by the United States. Congress. Whether the mortgage industry is breaking through the chaos and getting its fix before another industry does, it’s a guess.

The longer it takes for lawmakers and regulators to act, the worse the problem will be and the more difficult it will be to resolve. While the Federal Reserve is putting together a line of credit for mortgage agents seems straightforward enough, it still takes time, which is already strained by everything else. A month could be too late for many repairers.

“There has been an unrestrained level of awareness to every part of the administration and Congress, not only the industry but also consumer groups who realize the implications of all of this,” said Jim Parrott, non-member. -resident of the Urban Institute and owner of Falling Creek Advisors, a housing finance consultancy. “The $ 64,000 question is being given to all the other industries that are probably saying something similar, how do you prioritize the sectors of the economy that all need these credit facilities?”