Servicer Advances and Mortgage Payment Holidays
Updated: Apr 2, 2020
New York | In our March 22nd issue (“What Must Be Done to Support Housing Finance?”), we talked about what needed to happen in the market for mortgage backed securities last Monday to prevent the apocalypse in the short-term credit markets. The Federal Reserve and the GSEs rode to the rescue, and the markets for existing agency mortgage backed securities (MBS) started to settle down a bit last week. Indeed, some market participants think that the Fed even might have bought a wee too much in the past several weeks.
Mortgage Bankers Association President Robert Broeksmit said in a weekend email to MBA board members: "The Fed’s intervention was so strong that whipsawing mortgage prices threaten to swamp (bankrupt) dozens of IMBs with margin calls on their pipeline hedges. The combination of an industry hitting capacity constraints, unprecedented liquidity demands, and volatile financial markets is leading to severe distress amongst many in our membership."
Meanwhile, the carnage in the broader markets continues. This week in The Institutional Risk Analyst, we focus on the new issue market, which has basically ground to a halt in the past several weeks. The chart below from the Securities Market Industry Association (SIFMA) shows issuance through February. The red line represents Treasury borrowing, while the green line just below represents MBS issuance, residential and commercial.
Whereas the challenge facing the Fed and particularly the Federal Reserve Bank of New York last Monday was adding liquidity to the money markets, this week the shift focuses to reassuring investors that they should buy new issue Ginnie Mae and GSE MBS. The fate of many lenders, large and small, hangs in the balance based on what is done or not in the next several days.
Suffice to say that if MBS prices continue to surge, margin calls could put a number of lenders out of business next week. But restoring confidence among bond investors is equally important. As the chart suggests, there is probably well north of $150 billion in new issue agency loans stuck in lender pipelines as March comes to a close. And this does not include the vast wreckage of non-QM loans, credit risk transfer (CRT) securities and other detritus now clogging the financial arteries. The various fringe markets that were flourishing at the end of February have vanished as an asset class.
Last week, investors largely backed away from new issue Ginnie Mae MBS because of uncertainty as to home mortgage servicers would finance the huge advances that must be made on loans that go delinquent through the national payment holiday authorized by Congress. Incredibly, nobody in Congress seems to have considered the financial implications of declaring the Jubilee with respect to consumer loans of all descriptions. The Fed and other agencies are left to clean up the mounting mess.
On Friday, Ginnie Mae announced that it was invoking Chapter 34 of the servicing guide that is authorized by the Stafford Act, allowing Ginnie Mae to provide emergency funding assistance for issuers. This is an enormously important development that President Donald Trump, HUD Secretary Ben Carson and other members of the administration should highlight in their public comments on the response to the crisis. Ginnie Mae stated Friday after the close of the markets:
“Ginnie Mae fully anticipates implementing within the next two weeks, via an All Participants Memorandum (APM), a Pass-Through Assistance Program (PTAP) through which issuers with a P&I shortfall may request that Ginnie Mae advance the difference between available funds and the scheduled payment to investors. This PTAP will be effective immediately upon publication of the APM for Single Family program issuers, with corresponding changes made to Ginnie Mae’s MBS Guide in due course. We anticipate publishing PTAP terms for HMBS (reverse mortgage) and Multifamily issuers shortly thereafter.”
The good news is that Ginnie Mae, backed by the US Treasury, is moving to support the $2.2 trillion market served by government mortgage issuers. This is good. But we’ve not even touched upon the bigger task, namely providing advance funding to issuers in the conventional loan market served by Fannie Mae and Freddie Mac. The conventional market represents half of all US mortgages and some $5.5 trillion in outstanding MBS.
Federal Housing Finance Agency head Mark Calabria reportedly does not want the GSEs to provide any extraordinary assistance to the conventional loan market, but this reticence may not last through the end of this week. We’d suggest that instead of telling GSEs not to respond to market pressures “creatively,” being proactive in supporting issuers will pay big returns later. We’d also urge the FHFA to think of creative ways to leverage the Federal Home Loan Banks to finance servicer advances on agency and government loans.
Rest assured, we will figure this out. The logic is compelling. Bank and nonbank loan servicers must continue to pay investors who hold Fannie Mae, Freddie Mac and Ginnie Mae securities. In the conventional market, Fannie and Freddie are the issuers and pay the bondholders. In the Ginnie Mae market, the individual banks and nonbanks are the issuers and pay the bondholders directly.
If the banks/nonbanks cannot pay the GSEs, then Fannie and Freddie will very quickly hit a wall and require liquidity assistance from Fed and/or Treasury. In the government market, in the event of nonpayment by a bank/nonbank issuer, Ginnie Mae would immediately require Treasury to step in to make the payments. The next pay date for most mortgage backed securities is April 25th.
Again, as we’ve noted previously, the Federal Reserve Board continues to protect the franchise of the primary dealers at the expense of other market participants in providing liquidity. The obvious solution to a lot of the liquidity problems facing the secondary mortgage market is to simply create a standing repo facility that can transact in a broad range of securities and loans backed by the US government.
With the passage of the rescue legislation and the legal moratorium on agency loan payments, bank and nonbank mortgage servicers must scale up their operations dramatically to handle the load of customers who need help. Servicers are already buried in incoming calls from consumer seeking loan payment abatements. Call volumes are running an order of magnitude about February levels and dropped calls are soaring, a measure of building volumes.
Now that missing consumer loan payments is authorized by government fiat, the US mortgage industry faces a massive servicing task that may exceed the 2008-2012 period. At the same time, investors must focus on some urgent details, specifically how the payment holiday for mortgages and other consumer/business loans is going to impact banks, nonbanks and the Treasury.
In short-term, Fed needs to widen the specs of the TALF program to allow banks/nonbanks to pledge payment holiday advances on agency and government loans w/o a credit rating and directly with the Fed. The current spec is basically either to get a Fed loan 1) through a primary dealer or 2) directly for AAA securities. An advance backed by a GSE/FHA guaranteed loan should have the same eligibility for TALF as a "AAA" bond.
Another small detail. Should HUD/FHA stick with their current post-forbearance plan and rely on loan modification that requires the servicer to buy out the loan early from the pool? If, as many issuers anticipate, over 25% of all Ginnie Mae loans take advantage of the forbearance program, prepay speeds will accelerate dramatically. This will be followed by a slew of new issuance of seasoned loans recently off forbearance programs. This is a lot of paperwork for nothing.
If we follow the current HUD/FHFA plan, the US government would need to step in to support this down the road and may require even more significant Fed purchases. Better to create a program that will leave the loans in the Ginnie Mae security (in other words, not modify the loan) and a partial claims process that would work without the need for modification, recording of lien, and secured financing.
Even better, a process that would help solve servicer T&I responsibility, would be leaving the loans in the pool and allow partial claims to be filed at the beginning of forbearance. This provides advance liquidity to issuers beyond the Ginnie Mae PTAP program. Servicers can handle this as a customer receivable advance that will be owed by the customer at loan payoff and will not cause further significant disruption in the Ginnie Mae securities market.
We have great confidence that Secretary Steven Mnuchin and Fed Chairman Jay Powell will figure it out, but time is of the essence. There are a lot of lenders with fully locked mortgage production pipelines that may not survive through the end of next week. We need to see decisive action by the Fed and Treasury to reassure the concerns of large institutional investors in MBS – preferably before the opening on Monday in New York.
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