Opinion: Without Fed Fix, coronavirus rescue could crush residential mortgage market

“It’s so surprising, I couldn’t believe it was true when I first heard it. I had to check.

That was the reaction of Wake Forest University economics professor James R. Otteson to the details of the mortgage forbearance proposal in the $ 2 trillion coronavirus bailout. Specifically, the CARES Act states that any mortgage borrower can stop making payments simply by claiming that they are suffering economic hardship as a direct or indirect result of the COVID-19 crisis.

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Michael graham
InsideSources.com

Not only does the borrower not have to provide proof of his loss of income, the law expressly prohibits his lenders from even asking.

“The (loan) manager shall, with no additional documentation required other than the borrower’s attestation of financial difficulty caused by the COVID-19 emergency … provide forbearance for a maximum of 180 days, which may be extended for an additional period of up to 180 days at the request of the borrower, ” the act reads.

Six months mortgage leave, without any document proving that you have suffered a loss. This approach can achieve Washington’s goal of providing aid as quickly as possible, but it also creates challenges for the lending industry that Washington relies on to provide that aid.

Will there be a tsunami of skipped mortgage payments?

“Of course we want to help people who have lost their jobs, everyone wants to help,” said Scott Olson, executive director of the Community Home Lenders Association. “At the same time, we are seeing a tsunami of missed payments, payments on loans that have yet to be repaid. And unlike Freddie Mac, Fannie Mae, and the big institutional lenders, we can’t go to the Fed counter and get more money. “

For the typical homeowner who writes a check for the monthly mortgage, the inner workings of the credit industry don’t matter. But as Josh Rosner notes in a report for Graham Fisher & Co., ordering non-bank lenders to grant automatic forbearance without access to cash to cover their costs could cause real damage to a vital part of the economy.

“Non-bank administrators (who service over 60% of FHA loans and 30% of GSE loans) are required to ensure the collection of timely payments of principal and interest and to pass these payments on to mortgage-backed investors. . ” (GSE loans are loans “to government-funded businesses,” such as Fannie Mae and Freddie Mac.)

In other words, the local community lender who does not receive a mortgage payment must still send money to the investors who hold the note. A “tsunami” of such payments would be a disaster for the community mortgage industry.

“If the Fed doesn’t put in place a facility to keep them liquid, every independent originator and loan manager is at risk of failure,” Rosner said.

The usual economy does not apply

A Yale School of Management report on the CARES Act confirms these concerns.

“Non-bank mortgage loan managers now manage almost half of all mortgages. Moreover, as a team from the Fed and other economists pointed out in a recent paper: “Non-bank mortgage companies must also finance the costs associated with managing loans that are in arrears for long periods of time. Obtaining this financing can be difficult in times of stress. ”

When a country intentionally pushes its own economy into recession in order to combat an outbreak of the deadly virus, the usual economy does not apply. Getting money into the economy as quickly as possible may be a higher priority than protecting taxpayer dollars from borrowers playing against the system.

And then there is the larger issue of relying on the honor system to allow people to stop paying their bills.

“A lot of people will take advantage of this and stop making mortgage payments,” Otteson said. “When you subsidize something, you get more. The potential moral hazard is enormous. “

However, Kevin Erdmann, a visiting researcher at the Mercatus Center at George Mason University, is not so worried that people are taking advantage of the coronavirus legislation.

“When it comes to borrowers who ask for deferrals when they don’t need them, if they really want a few months of cash payments, they should be able to get a much better interest rate just by doing normal refinancing. “. rather than defer their payments.

When a country intentionally pushes its own economy into recession in order to combat an outbreak of the deadly virus, the usual economy does not apply. Getting money into the economy as quickly as possible may be a higher priority than protecting taxpayer dollars from borrowers playing against the system.

What the industry wants is for the federal government to clarify the rules surrounding the forbearance mandate

But community lenders and independent mortgage brokers (IMBs) are a key part of this economy. When the crisis passes, they will play an important role in channeling funds to the housing sector.

“If we let this liquidity crisis created by legislation eliminate all IMBs, we will end up with a much less competitive market, higher interest rates and less choice,” says Olson. “And the little guys are going to feel it the most.”

What the industry wants is for the federal government to clarify the rules around the forbearance mandate – perhaps by asking for minimal evidence of economic distress – and for the Fed to provide the liquidity that non-bank lenders need. to ensure the service of these loans until the end of the crisis.

“The major fix that needs to be put in place now is the messaging fix,” says Rosner. “If you’ve had an economic impact, of course these programs are there to help. But if you haven’t, if you are just trying to take mortgage leave, you are committing fraud by attesting to a difficulty that you did not experience. “

“People need to realize that when they ask for help that they don’t need, it’s harder to get help for those who really need it.”

About the Author

Michael Graham is the political editor of InsideSources.com.


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