Home Loan Defaults Could Decimate Mortgage Servicers

The Mortgage Bankers Association (MBA) is concerned that deferred and late mortgage payments due to lost jobs and reduced hours caused by the coronavirus could end up triggering a financial debacle for mortgage servicers, according to reports.

The Federal House Finance Agency (FHFA) said last week that it had told Fannie Mae and Freddie Mac to suspend all foreclosure actions and evictions for at least 60 days because of the coronavirus national emergency.

The Department of Housing and Urban Development, which also handles FHA mortgage loans, said it would follow suit.

The MBA sent a letter to Treasury Secretary Steven Mnuchin and Federal Reserve Chairman Jerome Powell asking that mortgage servicers get support as loan forbearance programs are put into play during the pandemic.

“MBA firmly believes that further action by Treasury and the Federal Reserve is needed to ensure the orderly functioning of the housing finance market. Specifically, Treasury and the Federal Reserve should: increase the scale and scope of agency mortgage-backed security (MBS) asset purchase operations; and develop a liquidity facility to support the mortgage servicing sector in anticipation of widespread borrower payment forbearance,” Robert D. Broeksmit, president and chief executive officer of MBA, wrote in the letter.

The association anticipates that strains on servicers could top $100 billion.

“In normal and even stressed environments, such as a localized natural disaster, servicers can withstand this liquidity pressure. Widespread, national borrower forbearance at the levels being proposed in response to the COVID-19 outbreak, however, extends well beyond any servicer advance obligations previously envisioned, and is beyond the capacity of the private sector alone to support,” the letter indicated.

Broeksmit told CNBC that if there is not enough liquidity, servicers won’t be able to meet the needs of the investors who back the mortgages “and the whole process will break down.”

“The risk to the servicing industry is that the demands on advancing these payments to the investors will outstrip their cash ability to do so,” he added.

Meanwhile, Bank of America (BoA) told customers impacted by the coronavirus that they can ask for mortgage, credit card and other loan deferments.