With calls to address mortgage servicer liquidity growing louder by the minute, the Federal Housing Finance Agency finally took action this week, announcing a four-month limit on payment advances for servicers of GSE loans.
Essentially, once a servicer with a loan backed by Fannie Mae or Freddie Mac has advanced four months of missed payments on that loan, it will have “no further obligation to advance scheduled payments.” The new rule applies to all servicers of government-sponsored enterprise (GSE) loans, regardless of type or size, according the FHFA’s announcement.
Freddie Mac already has such a contingency in place for servicers of loans with missed borrower interest payments. The new policy introduces the four-month limit for Fannie Mae loans as well.
“The four-month servicer advance obligation limit for loans in forbearance provides stability and clarity to the $5 trillion Enterprise-backed housing finance market,” said FHFA Director Mark Calabria. “Mortgage servicers can now plan for exactly how long they will need to advance principal and interest payments on loans for which borrowers have not made their monthly payment.”
The FHFA has also told Fannie and Freddie to keep loans in coronavirus-related forbearance plans within mortgage-backed security (MBS) pools for at least the duration of their forbearance. Historically, loans that are delinquent for over four months were typically purchased out of MBS pools by the GSEs; this direction effectively treats COVID-related forbearance like a natural disaster event, leaving affected loans in the MBS pool to reduce the liquidity demand on the GSEs.
The move is sure to be a welcome one to the trade organizations, advocacy groups and lawmakers pushing for policymakers to address liquidity concerns in the wake of mounting forbearances stateside due to the worldwide pandemic. But with the Mortgage Bankers Association (MBA) recently announcing that the share of loans in forbearance has risen to almost 6% of servicers’ portfolio volume, MBA President Robert Broeksmit wants to see further action, such as the establishment of a liquidity facility that the MBA and others have been urging.
“This is an important step in reducing the maximum liquidity demands for servicers who are providing mortgage payment forbearance for borrowers who have a pandemic-related hardship, and we appreciate FHFA’s action,” Broeksmit said. “This change limits the length of time that a servicer would need to advance principal and interest payments, but servicers are still responsible for advancing payments for property taxes, homeowners insurance, and mortgage insurance if the borrower does not pay them separately.”
“While this news reduces servicers’ worst-case cash flow demands considerably, we continue to stress the need for Treasury and the Federal Reserve to create a liquidity facility for those servicers who need it in order to continue to make payments to investors, municipalities, and insurers on behalf of borrowers who have been granted forbearance required under the CARES (Coronavirus Aid, Relief and Economic Security) Act.”
Scott Olson, executive director of the Community Home Lenders Association (CHLA), likewise praised the new policy, but also called for different measures to be taken.
“Today’s announcement is constructive — but the more important action would be to have Fannie and Freddie purchase properly underwritten loans that go into forbearance, in order to restore market stability similar to what Congress and the Fed is doing in other market sectors affected by the coronavirus,” Olson said, echoing remarks in a letter sent by the CHLA to the FHFA, Fannie and Freddie last week.