Non-bank servicers face a liquidity crunch
admin | March 27, 2020
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Many mortgage borrowers have already lost jobs as a result of efforts to contain the coronavirus, and it is likely that many more will. Various levels of government have put in place programs allowing borrowers to delay mortgage payments without being considered in default and without hurting their credit. But mortgage servicers still contractually need to advance principal and interest on behalf of loans placed into agency MBS. The scale of this crisis will likely place a tremendous strain on servicers, especially non-bank servicers with little liquidity.
Treasury Secretary Steven Mnuchin on March 26 launched a task force to recommend solutions with a deadline of March 30. Servicers generally are required to remit payments by the 15th of the month, with Ginnie Mae II MBS servicers required to remit by the 19th day, so there remains a short window of time to provide some mechanism to support servicers.
The total monthly principal and interest owed to Fannie Mae, Freddie Mac, and Ginnie Mae MBS is $40.6 billion (Exhibit 1). If 25% of borrowers were to miss their next mortgage payment then the industry would need to advance roughly $10 billion each month.
Exhibit 1: MBS pools are owed $40.6 billion P&I each month
Note: Current LTV is calculated using the Case Schiller home price index. Source: Fannie Mae, Freddie Mac, Ginnie Mae, eMBS, Amherst Pierpont Securities
The burden of advancing falls much more heavily on non-bank servicers, which are responsible for 55% of the total agency principal and interest payments. The situation is most extreme with Ginnie Mae MBS, in which non-bank lenders account for nearly 90% of all new origination and are responsible for 70% of all P&I payments. Ginnie Mae borrowers also have less equity than conventional borrowers, and the non-bank lenders’ loans tend to have less equity than bank lenders’ loans. Loans with less equity are more likely to default.
Without some assistance, many servicers are likely to run short on funds to fully advance principal and interest. Ginnie Mae and the GSEs will make the advances on behalf of servicers that default, but this would throw the mortgage market into turmoil. Ginnie Mae and the GSEs would also become responsible for servicing all of the defaulted lenders’ loans and would need to hire subservicers. It is likely impossible to find servicers that can add an enormous number of loans, especially in the midst of this crisis.
The amount of principal and interest that needs to be advanced is large. However, it pales in comparison to the amount of stimulus being injected into the market. Congress is poised to pass a $2 trillion dollar stimulus package. The Fed is buying $35 billion of MBS each day and has committed to buying up to $50 billion daily if needed.
The challenge does not center on whether or not to assist servicers, but on how to assist. The government will likely prefer that servicers use their own funds to advance as much as possible and require some form of compensation in return for any government assistance they receive. Ginnie Mae and the GSEs conduct reviews of their servicers’ financial condition and ability to handle stress scenarios, so they are likely already aware of how prepared each servicer is for this crisis.
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