- 2M of mortgage holders utilized mortgage forbearance or reduced payments due to economic fallouts from COVID-19 with the okay from the Federal Housing Finance Agency (FHFA) within weeks of CARES Act legislation
- FHFA also put out a moratorium on foreclosures and evictions for mortgages owned by Freddie Mac and Fannie Mae
- Mortgage bonds still disbursed by mortgage servers to hedge funds, pension funds and other entities
- Now what?
The 2008 financial crisis brought down the country’s financial system when homeowners stopped paying their mortgages. What was the underlying reason for those mortgage defaults? Risky loan products bundled into mortgage bonds that, some say, were destined to fail and resulted into shrunken value.
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In 2020 homeowners are again not paying their mortgages. This time, however, the underlying reason for this lack of or reduced payment for mortgage loans is not faulty/risky products…it’s that in March, the Federal Housing Finance Agency (FHFA) directed mortgage services of Fannie Mae and Freddie Mac to offer mortgage forbearance or reduced payments to homeowners impacted by the economic fallouts from the COVID-19 pandemic. Additionally, the FHFA declared a moratorium on foreclosures and eviction on properties with Fannie or Freddie mortgages.
What happens now that millions of mortgage payments are not going into mortgage bonds held by pension and hedge funds and banks like Wells Fargo, Citi and JPMorgan Chase? Patrick Boyaggie, CEO of the mortgage marketplace Own Up, said. “I think what’s scary about it is what the last recession crisis taught us is just how intertwined so much of financial markets are. You don’t just see something like this happen and there not be a ripple effect throughout the economy.”
FHFA directives cover mortgage borrowers who are not making their mortgage payments. Mortgage servicers, the companies that collect borrowers’ payments and then disburse those payments to investors via mortgage bonds, are still on the hook to pay investors regardless of borrowers making their payments.
Unaided, servicers, non-bank lenders and banks will have to use their capital reserves, insufficient over the long term, to cover these payments. Unaided, some of these servicers, lenders and banks may have to close, perhaps entirely or perhaps temporarily. Unaided, the entire mortgage foundation would collapse and investors would be holding worthless mortgage bonds.
The good news? The Federal Reserve has already made its intention clear of buying unlimited mortgage bonds to stabilize the market. The Fed has already made clear its intention of offering a line of credit to mortgage servicers to handle their cash flow problem.
The bad news? Every industry in the country has its hand out for relief packages due to the catastrophic economic fallout of the COVID-19 pandemic. Additionally, the longer it takes fro lawmakers and regulators to act, the longer, harder and more difficult it will be to “fix” these problems. Time is definitely not on anyone’ s side here.
According to Jim Parrott, a nonresident fellow at the Urban Institute and owner of Falling Creek Advisors, “Given the scope of the problems…in all…the industries, how do we prioritize which sectors of the economy that are in need of these credit facilities?”
Thanks to Curbed’s Jeff Andrews.
Also read: Freddie Mac and Fannie Mae Relaxing Appraisal and Employment Verification Guidelines, Airbnb Announces $250M COVID-19 Relief Fund for Hosts, Freddie Mac and Fannie Mae Relaxing Appraisal and Employment Verification Guidelines