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Moody’s: Liquidity Issues for Non-Bank Mortgage Sector Drop Outlook to “Negative”

Apr 02, 2020
Photo credit: Getty Images/Fokusiert

Moody’s has announced that it has changed its outlook on the non-bank mortgage sector from “Stable” to “Negative,” as liquidity issues continue to cause concern amid the COVID-19 pandemic. Non-bank mortgage companies currently originate and service more than half of all residential mortgages in the U.S.
“Our baseline scenario is that over the next several quarters, non-bank mortgage firms will face ongoing liquidity stress, weaker profitability, as well as declines in capitalization and asset quality,” said Moody’s in a release. “However, over the full 12-18 month outlook horizon, non-bank mortgage firms with solid origination franchises should be able to weather the increased servicing costs resulting from higher delinquencies and servicer advance obligations. The solid profitability of these firms’ production segments–driven by higher origination volumes and strong gain-on-sale margins–should more than offset higher servicing costs over the outlook period.”
In addition to the passage of H.R. 748, The Coronavirus Aid, Relief and Economic Security Act or the "CARES Act,” forbearance measures taken by the U.S. Department of Housing & Urban Development (HUD), Ginnie Mae also announced that it is addressing servicer liquidity issues.
However, it is projected that a windfall of borrower forbearance arrangements will be requested over the next few weeks. With the rise in non-payment, servicer advance obligations will rise, as servicers must advance principal and interest payments to mortgage loan securitization trusts when the borrowers are unable to make their monthly payments. The U.S. Department of Labor today reported a near doubling in unemployment insurance claims over last week, as for the week ending March 28, the advance figure for seasonally adjusted initial claims was 6,648,000, an increase of 3,341,000 from the previous week's revised level.
“The liquidity of non-bank mortgage companies, which we have long identified as a key sector weakness, will remain under substantial pressure over the next several quarters, during which we expect the operating environment to remain challenging,” noted Moody’s in its April 1st Outlook Report. “These firms are highly dependent on short-term secured repurchase facilities, which are subject to margin calls, exposing the companies to considerable liquidity risk if the values of the pledged assets, which are marked-to-market daily, decline.”

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