Mortgage Payment Deferrals Could Cost Non-Bank Lenders $12B Per Month

Non-bank lenders are on shaky ground as they face the prospect of mortgage payment forbearance with the ongoing coronavirus pandemic, which could end up costing them $12 billion per month, according to the Financial Times.

They’re feeling pressure from financial institutions and could face ratings downgrades, with Moody’s switching its forecast from “stable” to “negative” for U.S. firms on Thursday (April 2). Moody’s said the next few weeks could contain everything from ongoing stress and weaker profits to lowering asset qualities.

The problem lenders face is that unemployed borrowers have now been granted the power to ask for forbearance under the federal guidelines, and servers must still make payments to bondholders anyway.

Michael Fratantoni, chief economist of the Mortgage Bankers Association, said the lenders would soon end up owing billions if the programs have even a 25 percent increase in forbearance activities. He said some lenders would be fine for the short term, but in the long term, it would be impossible to sustain.

U.S. Treasury Secretary Steven Mnuchin said he was committed to fixing this issue. But although he convened a task force to help with that, nothing had been announced as of Thursday.

The way the loans work is that the non-bank lenders make loans into bundles, which, if approved by the government-backed Fannie Mae and Freddie Mac, are sold on bond markets. Lenders then continue to act as servicers on those loans, and if forbearance is invoked, Fannie and Freddie have to reimburse the servicers. The issue is that reimbursement comes at a lag, which creates problems even in non-crisis times.

Fannie and Freddie guarantee payments on around $5 trillion in U.S.-based mortgages. Another service, Ginnie Mae, guarantees $2 trillion in payments. Last week, Ginnie Mae offered some relief to mortgage servicers by invoking tactics typically used in natural disasters.

Mortgage applications from home purchases probably won’t be rising anytime soon due to people continuing to follow social distancing guidelines and staying where they already are.