[REN #881] COVID-19: Bankruptcy Risk for Nonbanks

COVID-19: Bankruptcy Risk for Nonbanks, Real Estate News for Investors Podcast Episode #881

Forbearance will help save property owners who can’t pay their mortgage, but who’s going to save the mortgage service companies that have to pay the bond holders? Major players in the housing industry say that without a bailout, companies like Quicken Loans, Freedom Mortgage, Mr. Cooper, and other nonbank mortgage companies could have a serious liquidity problem. FHFA Director, Mark Calabria, doesn’t agree. He says there’s no evidence of a systemic failure among nonbanks.

The pandemic has triggered concerns about another foreclosure crisis because of all the job losses. That prompted the creation of a mortgage forbearance program for homeowners as part of the $2 trillion Cares Act. This provision gives all borrowers with government-backed loans the right to a 90-day forbearance on mortgage payments. The program also allows for up to a year of mortgage payment delays, without any late fees or credit dings. 

Mortgage Forbearance Mandate 

This homeowner rescue legislation opened up a floodgate of forbearance requests and nonbanks are now concerned that they don’t have enough capital to cover those requests. Banks have been strictly regulated with stress tests and capital requirements. That’s not the case for nonbanks. And, the Cares Act doesn’t provide financial help for mortgage servicers.  

They are now worried about a long stretch of missed mortgage payments. Freedom CEO Stan Middleman told American Banker that most nonbanks have enough liquidity to cover payments for several months but could run into trouble if this situation runs longer than half a year. He said, “This is not like a flood in Missouri. This is everywhere all at once.” (1) 

Without a bailout, industry experts say we could see bankruptcies. If it gets bad enough, they say we might see major damage to the U.S. housing market. 

Request for Government Help

That concern led to a plea from some big names in the housing industry. A coalition of organizations issued a statement to lawmakers over the April 4th weekend requesting a bailout for these service providers. These organizations include the Mortgage Bankers Association, the National Association of Realtors, the National Multifamily Housing Council, and U.S. Mortgage Insurers. They expressed support for the forbearance program, but they say the sheer size of the response is nothing that they, or anyone else, anticipated. They said in the statement, “It is therefore incumbent upon the government to provide the final piece of the puzzle — a liquidity facility for single-family and multifamily services — to ensure that the entire industry can deliver much-needed economic relief to consumers through this unprecedented forbearance plan.”

Nonbanks Resisted Regulation 

Nonbanks have been a growing source of home loans, including non-confirming loans used by many real estate investors. But as I mentioned, they haven’t been subjected to the same regulations as banks. The American Banker says, Ginnie Mae wanted nonbanks to undergo stress tests and maintain higher reserves, but those efforts were met with resistance. In the words of former Ginnie president Michael Bright, “Nonbanks were violently opposed to the idea.”  Now, they have a big problem on their hands, but it is something much different than the 2008 housing crash. Poor underwriting was at the heart of the problem back then. This time, borrowers are more qualified with more equity in their homes, but due to this unexpected health crisis, massive numbers of people are out of work.

Surprise Shock to the Economy 

No one anticipated this kind of shock to the economy. And without a quick recovery, more people will lose their jobs. If the economic shutdown continues through the summer, Moody’s Analytics chief economist Mark Zandi says that some 15 million homeowners may default on their loans. That’s about 30% of U.S. home loans.  The senior VP of the Mortgage Bankers Association, Pete Mills, says that nonbanks are being unfairly punished for something that was impossible to predict. He doesn’t believe that a previously conceived liquidity standard would’ve been enough to accommodate the current situation. 

What Happens if Nonbanks Fail? 

According to some housing experts, we are looking at potential bankruptcies in the nonbank sector. American Banker says, if that happens, federal agencies will have to “rush in” to find other companies to take over the loans. That would also make it more difficult for borrowers to get loan modifications, and it will leave fewer options for borrowers that don’t fit the conforming loan standard.

Bankruptcies could also have a devastating impact on Ginnie Mae, which guarantees a lot of lower-income loans. The Urban Institute says, nonbanks service about two-thirds of all mortgages, and nine out of ten loans that are backed by Ginnie Mae. Those loans fell into the realm of the nonbanks after larger banks reduced the number of Ginnie Mae loans they were willing to take.

Nonbanks like Quicken Loans, Freedom Mortgage, and Mr. Cooper helped fill the gap. Ginnie Mae did issue a statement a few weeks ago saying it is prepared to “continue providing services across its range of stakeholders.” (2) It says, it is in close communication with issuers, services, vendors, and trustees, so the situation is being monitored. Ginnie says, “We are addressing the economic impact resulting from the outbreak and will take further action as necessary.”

FHFA: Risk to Mortgage Industry Is Overblown

The Federal Housing Finance Agency Director, Mark Calabria, told Housingwire that he doesn’t believe the mortgage industry is about to collapse because of forbearance requests. (3) He says, “From looking at the financials, we’re not seeing any evidence that the stress in the nonbank side is systemic.” He says, a “small minority of firms are experiencing stress” but says it’s not affecting the entire industry.

As of an April 7th article in HousingWire, Calabria says the number of forbearance requests at Fannie Mae and Freddie Mac are less than 2%. He doesn’t believe that any nonbanks will have to shut down, but he says some may have to sell assets to raise operating capital.

Calabria also disagrees with forbearance projections that range from 25% to 50%. He says, “I don’t know where those estimates are coming from, because they just don’t match anything we’re seeing at all.”

Some industry experts have advocated for a liquidity facility for the housing finance market. Former Ginnie president Ted Tozer is one of them. He told American Banker that nonbanks need a lending facility similar to what banks have with the Fed. Calabria denies the need at the current time, although he did say during a CNBC interview that it might be needed a few months from now, but not at the moment. (4)

Links:

(1) American Banker Article

(2) Ginnie May Statement

(3) HousingWire Article

(4) CNBC Report

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