Many of the country’s largest mortgage lenders are warning they will be soon pushed to the brink of failure with millions of Americans laid off due to the coronavirus outbreak likely to miss their next loan payment, threatening to disrupt the housing market in a way not seen since the Great Recession.
If 25 percent of borrowers cannot make their mortgage payments because of job loss or other financial disruptions due to the coronavirus, mortgage industry officials say they could need nearly $40 billion in federal help over the next three months and $100 billion over nine months. The industry tried but failed to secure language guaranteeing some mortgage companies access to government loans in the emergency $2.2 trillion economic rescue package passed by the Senate and expected to be voted on by the House Friday.
The mortgage industry now has set its sights on grabbing a portion of the $454 billion in loans and loan guarantees allocated by the Treasury Department and the Federal Reserve under the legislation. That pot of money is intended to help large companies remain afloat and has fewer strings attached than other portions of the package.
Without federal assistance, some mortgage servicers say they could go out of business within a few months, potentially making it more difficult for homeowners to secure mortgage relief as the U.S. economy grinds to a halt to contain the growing pandemic.
“A small sliver of that could easily be dedicated to a fund that would provide the liquidity to our servicers, while borrowers are getting back on their feet from the coronavirus," said Bob Broeksmit, the chief executive of the Mortgage Bankers Association, a large industry trade group.
A decade after shoddy mortgages nearly brought down the U.S. economy, the coronavirus has exposed new weakness in the housing market, which is increasingly dominated by firms operating outside the traditional banking system and with little federal oversight. Nearly 60 percent of the America’s mortgages are secured through non-bank lenders such as Quicken Loans. One in three of the country’s $11.2 trillion in mortgages is overseen by non-bank servicers, which collect borrowers’ payments every month, and say the economic fallout from the pandemic represents an unprecedented challenge to their future.
But their pleas for help have met skepticism from groups that have long called for tougher industry oversight. One of the companies reported $2 billion in revenue last year.
“How can these companies credibly lobby against strong regulation and supervision during peaceful economic times, and then beg the government for assistance during periods of stress,” said Gregg Gelzinis, senior policy analyst at the left-leaning Center for American Progress. “This industry needs to be more resilient.”
Mortgage lenders are preparing for an avalanche of distressed homeowners that could drive a housing crisis that rivals the one that left millions of Americans in foreclosure a decade ago. This time, rather than homeowners falling behind on their payments slowly over several years, mortgage delinquencies could spike suddenly as people find themselves without a job or have their salaries cut within the next few months.
“The last time the problems were concentrated in borrowers with weak credit and bad loans,” said Guy Cecala, publisher of Inside Mortgage Finance. “This time the problems are going to be non discriminatory. It will apply to people with good credit, or someone who is well off, and ran a restaurant. We haven’t had a crisis where everyone is impacted regardless of financial situation.”
PennyMac, which services about $369 billion in mortgages, said it has already seen a more than 100 percent increase in customers seeking forbearance plans over normal rates.
Virginia-based LoanCare, which services $360 billion in mortgages, has received more than 21,000 calls from borrowers over the past two weeks related to the coronavirus, said LoanCare President Dave Worrall. Most of those borrowers, 90 percent, have yet to miss a payment but fear they could soon, he said. “I think everybody is anticipating the virus to go on for a while, and they are already seeking assistance," Worrall said.
LoanCare is planning to hire several hundred people over the next few months to deal with the expected onslaught of borrowers seeking assistance.
The mortgage industry is most concerned about the millions of homeowners expected to apply for mortgage relief as bars, restaurants and small businesses throughout the country continue to shut down. Federal officials have ordered mortgage servicers to offer generous forbearance plans that will allow many homeowners to skip their mortgage payments for up to a year.
Enrollment in these programs is expected to explode as the industry attempts to avoid a repeat of the 2008 financial crisis, when homeowners complained of laborious paperwork requirements and bungled applications.
“All you have to do over the phone is say you need help” and were affected by the coronavirus outbreak to secure forbearance, said Jay Bray, chief executive of Mr. Cooper Group. The company is the country’s third largest mortgage servicer, behind Wells Fargo and JPMorgan Chase.
Mr. Cooper has already seen a 50 percent increase in borrowers seeking assistance, Bray said. “The magnitude of people who are going to take the plan is going to be like nothing we have ever seen," he said.
Dallas-based Mr. Cooper is among the non-bank mortgage servicers that have grown to dominate the industry. It had just $21 billion in mortgages in 2008 and reached $641 billion last year with 3.8 million customers. It reported a profit of $270 million last year and $2 billion in revenue.
Mortgage servicers such as Mr. Cooper act as an intermediary between borrowers and the owners of their loans. When borrowers do not make their payments, even if they are enrolled in a forbearance program, the mortgage servicer must use its own money to pay the owner of the loan.
That will cause a cash crunch for many servicers, which may not have enough to make up the difference if a large number of borrowers can’t make their payments, industry officials say.
“We just don’t have the capital to fund this level of customer assistance," Bray said. "It is the right thing to do for the customer, and the country” but he said the industry will need help.
The Federal Reserve and the Treasury Department should establish an emergency loan program for cash-strapped mortgage servicers, industry officials say. The loans would be repaid as borrowers started to catch up on their payments, they say.
“We’re cautiously optimistic, and we don’t have much time left," said Ed DeMarco, president of the Housing Policy Council, another industry group. “It is still absolutely essential to the stability of this market and the success of the borrower forbearance program, that this facility be announced and up and running as quickly as possible."
Such a fund would not be an industry bailout since all of the money will be sent to owners of the loans, said Bray, of Mr. Cooper. "We’re not using this money to make payroll, to pay rent,” he said.
The Federal Reserve declined to comment. A Treasury Department spokesman did not respond to an email seeking comment.
But the industry’s requests have revived concerns that non-bank mortgage lenders, which have largely escaped the toughest post-crisis regulation endured by banks, pose too much risk to the housing market.
Unlike banks, federal regulators have little insight into their finances or financial health. Non-bank lenders are not required to have the same capital cushion to safeguard against an economic downturn, industry experts say. Instead, they receive most of their oversight from state regulators.
That is not enough, said Nancy E. Wallace, a finance and real estate professor at the University of California Berkeley. “They are not regulated. They are quote unquote supervised. But there is no consistency in the oversight of these firms, state by state,” Wallace said. “We need transparency into these markets to see where risks were building.”
Any industry bailout should come with strings, including tougher federal oversight, she said. “There needs to be consequences for this going forward,” she said. “To bail them out after the fact is really unconscionable.”
The industry says it already receives enough oversight. In 2018, an economist for the industry lobbying group, the Mortgage Bankers Association, told The Washington Post: “Non-banks are appropriately capitalized for the risks that they take.”
That presumed normal economic conditions not the financial shock caused by the coronavirus pandemic, industry officials say now. “This is hitting at a time when their [mortgage servicers] capacity is already constrained because of the pandemic," said Broeksmit of the Mortgage Bankers Association.
The Federal Housing Finance Agency, which regulates mortgage companies Fannie Mae and FreddieMac, has begun preparing for the possibility that some non-bank mortgage servicers may fail, Mark Calabria, the agency’s director, said in an interview with Bloomberg TV Wednesday.
“If this goes on for more than another six or eight weeks, we’re going to be looking at a lot of stress among servicers,” Calabria said.
It could also spill over onto Fannie Mae and Freddie Mac, which back half of the country’s mortgages, he said. “We’re anticipating that Fannie and Freddie will have to take delinquent mortgages onto their balance sheets,” he said.
Fannie Mae and Freddie Mac buy mortgages from lenders, then package them into securities to sell to investors. They have been under government control since 2008 when they were bailed out by taxpayers. The mortgage giants have been profitable in recent years but lawmakers and regulators have warned that they operate with a thin financial buffer.
Even homeowners with loans held by traditional banks say they are having trouble securing mortgage relief.
On Monday, Kern Kuipers called his mortgage servicer for help after being laid off from a printing company. It offered to allow Kuipers to skip three months of mortgage payments but said the money would have to be repaid in full when the forbearance ended or over six months, which would increase his monthly payments by 50 percent.
“It moves my financial hardship three months down the road," Kuipers said.
All debt payments, from mortgages to car payments, should be frozen during the coronavirus outbreak, he said. “Put everything on pause for a few months, and let us get through this.”
Kuipers’ servicer, Old National Bank, said in a statement that it would be reaching out to Kuipers after receiving new federal guidance “regarding a new option to defer payments that could benefit such mortgage borrowers.”