With the fallout of the 2008 mortgage crisis fresh in our minds and still shaping the market and policy, the government and market participants have acted swiftly to step in and offer some immediate relief for borrowers, while keeping liquidity as high as possible.
The Federal Housing Finance Agency has made plans to suspend foreclosures and evictions for single-family mortgages backed by Fannie Mae and Freddie Mac for 60 days. The HUD would do so for foreclosures and evictions through the end of April for mortgages that are insured by the Federal Housing Administration. The FHFA has also said they would permit payment forbearances to last for as long as a year for borrowers impacted by coronavirus.
In addition, action has been taken to protect multifamily property owners. The FHFA, through Fannie Mae and Freddie Mac, will grant mortgage forbearances to multifamily property owners under the condition that they suspend all evictions for renters unable to pay rent for the period of the forbearance.
The FHFA has also agreed to provide appraisal alternatives to reduce the need of appraisers having to enter dwellings and employment verification flexibility to assist in closings through May 17, 2020.
Under an Executive Order issued by Governor Andrew Cuomo of New York, and an associated emergency regulation issued by New York’s Superintendent of Financial Services, New York regulated banks and mortgage servicers are required to grant a 90-day forbearance on mortgage payments to any homeowner facing financial hardship due to the pandemic. The order and regulation also require New York regulated banks to waive ATM Fees, overdraft fees and credit card late payment fees for any individual facing financial hardship due to the pandemic.
In public remarks introducing these measures, Governor Cuomo stated that credit reports for individuals granted relief will not be impacted, but emphasized that any mortgage payments not made during a forbearance period will be shifted to the back-end of the mortgage, with no late fees.
Governor Cuomo has also separately issued an executive order suspending residential and commercial foreclosures for 90 days.
Though broader relief to borrowers is being considered by the federal government as well as industry leaders, any relief to consumers should be balanced with relief to investors and other market participants. So far, the government appears committed to provide liquidity to credit markets, including RMBS, through the Term Asset-Backed Loan Facility (TALF).
Mortgage servicers have called attention to the fact they will not be able to make advances needed to keep investors whole if there are a massive number of forbearances. Particular points of concern are servicers carrying FHA and VA loans who do not get reimbursed by Ginnie Mae for advances for delinquent loans. Nonbank issuers working with Ginnie Mae would also struggle to carry advances.
Several trade groups working together (Mortgage Bankers Association, Housing Policy Council and American Bankers Association) have approached the government with a plan that would give borrowers experiencing a hardship due to the virus a three-month period of payment relief (with the potential of stretching to a year), but without any loan forgiveness. They are asking for the government to backstop this commitment and are looking for action soon to show a commitment to protecting servicers. The Congressional stimulus package passed by both houses on March 27 did not include any servicer relief, and the first of the month is fast approaching.”
At the end of the day, it’s a mortgage crisis-redux despite better practices put in place after the last crisis. The coronavirus, much like the potential impact of climate change on the value of the underlying collateral, is a reminder that unexpected shocks can, and will, happen. If the new reality contains heightened risk of random destruction from forces of nature, volatility will become a new reality. Though unexpected shocks will happen, they don’t need to remain unplanned for. The first step to planning is making sure you can live with the downside (e.g., potential losses from investments, operations and litigation) if the worst case happens.
Nicole Serratore, an Attorney, in the Insolvency, Creditors’ Rights & Financial Products Practice Group of Davis & Gilbert, contributed to this post.