Key Highlights

  • CARES Act mandates that borrowers with GSI mortgages allowed to delay monthly mortgage payments for at least 90 days and up to one year
  • Urban Institute estimates that 62% of all first lien mortgages are GSI backed
  • No questions asked as required by law but mortgage bond holders still must be paid

The $2.2T Coronavirus Aid, Relief and Economic Stress Act (CARES) was passed with the intention of limiting the financial damage to the economy caused from the COVID-19 pandemic. One of the relief programs within the CARES Act is directed to help homeowners negatively affected by financial losses due to COVID-19.

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Borrowers with government backed mortgages from Freddie Mac and Fannie Mae, an estimated 62% of all mortgages according to the Urban Institute, are allowed to delay at least 90 days, and possibly up to one year, of monthly mortgage payments.

Meanwhile, due to the scale of the pandemic’s financial impacts, borrowers are asking their lenders for these deferrals in droves without having to show any required-by-law documentation of financial hardship. And simultaneously, servicers are obligated to pay mortgage bondholders without having the cash from the mortgage payments to pay them.

Speaking on behalf of the largest nonbank mortgage servicer in the country with nearly 4M government-backed loans that has already granted more than 80,000 forbearances, Mr. Cooper, CEO Jay Bray said, “(This situation) is frankly frustrating and ridiculous that we do not have a solution in place. There is going to be complete chaos…for the industry as a whole (both nonbanks and banks) and you’re going to start seeing problems soon.”

This last weekend, the first Saturday in April, a coalition including the Mortgage Bankers Association, National Association of Home Builders, National Association of REALTORS, Independent Community Bankers of America, U.S. Mortgage Insurers and National Apartment Association issued the following press release, “The scale of this forbearance program could not have been foreseen by mortgage servicers, or fully anticipated by regulators…it is therefore incumbent upon the government to provide a liquidity facility for single-family and multifamily servicers…any further delay could lead to greater uncertainty and volatility in the market.”

Some industry experts see no liquidity problem for mortgage servicers at this point in time. Mark Calabria, director of the Federal Housing Finance Agency that oversees Freddie and Fanny, estimated roughly 2M borrowers seeking forbearance by May but, “…if this (the pandemic) goes longer than two or three months…that’s going to be a lot of strain, and certainly we’re going to start to see some firms get into a lot of liquidity trouble.”

Other industry experts including Laurie Goodman, co-director of the Housing Finance Policy Center at the Urban Institute, and Mark Zandi, chief economist at Moody’s Analytics, predict higher estimates for the forbearance program. Goodman sees a worst-case scenario of nearly 12M borrowers at the cost of $66B for 6 months and Zandi predicts some 15M borrowers.

David Stevens, former CEO of the Mortgage Bankers Association, and Bray of Mr. Cooper see this “problem” and risk to the mortgage market as, if unmodified, one that could curtail lending overall “…because these companies will be in the middle of a crisis.” Said Bray. “We’ve seen a lot of businesses close their doors and if you start closing the doors of servicers you’re impacting people’s lives much more than other sectors. You’re talking about their homes.”

Thanks to CNBC Diana Olick.

Also read: Reactions to Federal Reserve’s Moves, Podcast: Global Economic Crash, What Next? | Tim and Julie Harris Sunday Special, SBA Economic Injury Disaster Loans