Non-bank servicers face a liquidity crunch
admin | March 27, 2020
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
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.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Copyright © 2023 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.