Fannie-Freddie Not Buying Problem Loans Has U.S. Seeking Fix
(Bloomberg) -- Fannie Mae and Freddie Mac’s regulator is confronting a fresh crisis for the U.S. housing market: The companies won’t buy recently issued loans that were made to borrowers who already can’t afford their monthly payments because of coronavirus.
Industry executives have told the Federal Housing Finance Agency, that the issue is causing severe disruptions for the real estate sector because it’s keeping the mortgage giants from guaranteeing new loans in forbearance. In response, FHFA may announce an update to Fannie and Freddie’s policies aimed at easing the problem as soon as this week, said people familiar with the matter who requested anonymity because no changes have been publicly announced.
FHFA spokesman Raphael Williams said the agency is aware of concerns and is “working to find out the breadth of the issue and possible solutions.” He declined to comment on any tweaks being considered.
The dilemma is the latest to emerge from the fact that swaths of homeowners have stopped making mortgage payments because of lost jobs or income. Many borrowers are making use of a provision in last month’s $2 trillion stimulus legislation, which encourages forbearance for consumers with government-backed mortgages who’ve suffered economic hardship because of the coronavirus crisis.
Almost 6% of borrowers had delayed making their mortgage payments as of April 12, up from 3.7% a week earlier, according to the Washington-based Mortgage Bankers Association. The issue has prompted industry trade groups to seek a federal bailout for mortgage servicers, firms that collect money from homeowners and funnel payments to investors in mortgage-backed securities. The concern is that the companies will face a cash crunch as missed payments pile up.
The FHFA is adjusting other policies to help ease disruptions in the mortgage bond market stemming from an uptick in forbearance requests. On Tuesday, the agency announced that servicers of loans in forbearance that are backed by both Fannie Mae and Freddie Mac will be required to advance four months worth of payments to the mortgage giants. Previously, those terms only applied to Freddie-backed loans.
“Mortgage servicers can now plan for exactly how long they will need to advance principal and interest payments on loans for which borrowers have not made their monthly payment,” FHFA Director Mark Calabria said in a statement.
Fannie and Freddie, which have been under government control since the 2008 financial crisis, play a crucial role in the housing market by buying loans from lenders and packaging them into mortgage bonds. Those securities have guarantees that protect investors in case borrowers default.
When borrowers get approved for a loan, it can sometimes take weeks for their lender to sell that mortgage to Fannie or Freddie. During the coronavirus pandemic, lenders say borrowers are increasingly seeking forbearance before they’ve made any payments on a new mortgage or refinanced home loan. Because Fannie and Freddie won’t guarantee such loans, some lenders and homebuyers are in limbo.
Financial-industry executives have been lobbying the FHFA to come up with a solution, arguing that it’s exacerbating liquidity shortfalls for mortgage servicers. When homeowners go into forbearance, servicers must still advance payments to mortgage-bond investors. They will eventually be reimbursed by Fannie and Freddie, but risk running out of cash in the meantime.
Because they can’t be sure Fannie and Freddie will buy newly issued loans that have entered forbearance, banks are tightening credit lines on mortgage companies that rely on those funds to extend credit to consumers, industry executives say. That threatens to increase mortgage rates for borrowers over time.
“This is much more widespread than I would have thought,” said Edward DeMarco, head of the Housing Policy Council, whose members include Wells Fargo & Co. and Quicken Loans. “This is a rapidly emerging issue,” added DeMarco, who previously led the FHFA.
Other groups, including the Mortgage Bankers Association and Community Home Lenders Association, have also pushed for changes.
JPMorgan Chase & Co. is among firms that have recently announced they will be tightening standards for mortgages. While changes to Fannie and Freddie’s policies could help alleviate the issues that are prompting banks to pull back credit lines to nonbank mortgage companies, it won’t completely alleviate the liquidity shortfalls those firms are facing, industry executives say. Some sort of government loan program is the only thing likely to fix those problems, according to some analysts.
“These are two separate but related issues,” said Richard Cooperstein, a mortgage consultant and director of strategy at the analytics firm Andrew Davidson & Co., Inc. “This is a short-term problem. The bigger servicer liquidity issues will endure for months.”
So far, however, officials have held off on extending a lifeline to servicers. Calabria has declined to let Fannie and Freddie offer liquidity to these companies, prompting a backlash from the finance industry.
The pressure is mounting for Treasury Secretary Steven Mnuchin and Federal Reserve Chairman Jerome Powell to set up a liquidity facility using funds from the $2 trillion coronavirus stimulus package. Lawmakers, consumer advocates and mortgage industry lobbyists have been pushing for the Fed and Treasury to act.
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