Fannie Mae and Freddie Mac could play a role in preventing a new mortgage crisis, although that remains up for debate. The Federal Housing Finance Agency is considering allowing the government-sponsored enterprises to buy mortgages that have entered forbearance recently. That would provide some relief to non-bank mortgage servicers, which must continue making payments even if borrowers have hit the pause button due to COVID-19-related financial hardship.
Fannie Mae, Freddie Mac could buy loans in forbearance
Fannie Mae and Freddie Mac recently announced that they would stop buying mortgages that are in forbearance. That would leave debt piling up on the books of non-bank mortgage servicers. However, sources reportedly told The Wall Street Journal that the FHFA is considering allowing the GSEs to buy loans in forbearance. They said the agency was still ironing out the details, but an announcement could come as soon as this week.
The FHFA has previously pushed back against pressure from the mortgage industry and lawmakers to help servicers. It has said it wants more data on how many borrowers are requesting forbearance. As part of the $2 trillion CARES Act, homeowners are allowed to request forbearance for up to a year. However, mortgage servicers are still on the hook for those payments.
Why a new mortgage crisis is a possibility
In a report last week, Dick Bove of Odeon Capital said he believes that the CARES Act could create a new mortgage crisis, driving non-bank mortgage servicers into bankruptcy if a significant number of homeowners request forbearance. If that happens, he believes the mortgage-backed securities market would experience about a $100 billion "dilemma."
He explained that non-bank servicers arrange loans but acquire the money to do so from a third party. Firms that also service these loans charge a fee to collect payments from the borrower and send them to the loan holder. If borrowers enter forbearance, non-bank servicers must still make those payments even though the borrowers have put off making payments.
Bove suggested four possibilities of avoiding a new mortgage crisis, one of which involves Fannie Mae and Freddie Mac. The first possibility is that mortgage servicers could make the payments themselves using their retained earnings, but he believes this is very unlikely. The second possibility is that the Federal Reserve could open a $150 billion facility for mortgage servicers, but it has refused so far.
What regulators must do
The third is that the FHFA could provide funding in various fashions. At the time of his note, the agency had refused to do so. The final possibility is that other large bank servicers could take over the obligations of failing servicers. They might do that at 50 cents on the dollar, although the price could be more or less. However, he also said that this solution wouldn't actually solve the problem.
Tim Pagliara of CapWealth Advisors told ValueWalk in an email that the issue of preventing a mortgage crisis shouldn't come from Fannie Mae or Freddie Mac, but rather, from the Treasury Department.
"The mortgage servicers should negotiate relief directly with the Treasury over capital issues," he said. "Mr. Calabria acknowledges that his authority comes from the statute he operates under-- HERA. He has no authority to grant relief to mortgage loan servicers. The number of mortgage loan servicers that fail is irrelevant to the mission of the FHFA. That being said, Calabria needs to be concerned about forbearance and work with Treasury on a solution. It is ironic that the MBA and the other entities that are crying for relief are the same ones that denied the GSEs capital for this counter-cyclical moment of crisis."
How Fannie Mae and Freddie Mac could avert a mortgage crisis
Amid pressure for Fannie Mae and Freddie Mac to step in and help avoid a new mortgage crisis, the FHFA is now considering that they could buy loans in forbearance. That could help alleviate some of the problem and potentially avoid some of the issues brought up by Bove and Pagliara. Essentially, the GSEs would be providing some relief to mortgage servicers without directly providing funds to keep them from failing.