FHFA Addresses Servicer Liquidity With Four-Month Advance Obligation Limit
April 21, 2020
The Federal Housing Finance Agency has announced new policies that will aid mortgage servicers struggling to cover advance monthly principal and interest payments for mortgage loans. The policy states that mortgage servicers are only responsible for four months of missed payments on a loan. After that time frame they are relieved of any obligation to cover the payments.
If a loan is in a mortgage-backed security, Fannie Mae servicers with scheduled payment remittance are responsible for advancing the principal and interest payments regardless of borrower payments. Freddie Mac servicers responsible for advancing scheduled interest are only obligated to advance four months of missed interest payments.
“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."
“This is a good move by the FHFA, and while it does not solve the problem entirely, it reflects the fact that reality finally crept into the decision-makers' thinking,” said David H. Stevens, CEO of Mountain Lake Consulting Inc. “Next, they need to address first payment forbearance loans as eligible for sale, and hopefully, a liquidity facility will still be set up by the Federal Reserve. If these next two steps are taken, we will have gone a long way to avoid a head-on collision.”
“Help is on the way,” said Barry Habib, founder and CEO of MBS Highway. “It appears to be a concession because of all the pressure that has been placed on the FHFA and Calabria. It will still need to be monitored and there will still need to be clarity on a facility to help with advances and first payment defaults. While this is not a total solution, it is a good first step.”
David Luna, an industry expert and president of Mortgage Educators and Compliance, said, "Fannie Mae servicers are responsible for advancing the four months principal and interest payments. Freddie Mac servicers are only obligated to advance four months of missed borrower interest payments. Maybe now we will see some of the overlays in FICO scores and LTV start to be loosened. And jumbos will come back sooner to the market. I believe that the Federal Reserve may still step in if further help is needed.”
The FHFA stated that the enterprises will need to maintain loans in COVID-19 payment forebearance plans in mortgage-backed-security pools, for at least the duration of the forbearance plan.
"The industry earnestly tries to respond to crises quickly,” said Carissa Robb, president of Constant, a Maine-based financial technology company. “However, they are handcuffed by limited infrastructure capable of evaluating more complex, sustainable relief options. One-size-fits-most playbooks are deployed as a stopgap, which halts payments in aggregate. Evaluating the ability to continue to pay in a more intentional way would differentiate severe financial hardships from strategic plays. Relief options need less barriers, and we need to challenge ourselves to operate with greater precision, without compromising the speed to market for those in need."
"Today's action clarifies that mortgage loans with COVID-19 payment forbearance shall be treated like a natural disaster event and will remain in the MBS pool," according to the release. "This change reduces the potential liquidity demands on the Enterprises resulting from loans in COVID-19 forbearance and delinquent loans."
“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," said Mortgage Bankers Association president and CEO Robert D. Broeksmit, CMB. "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 Act.”
John Ryan, president and CEO of the Conference of State Bank Supervisors (CSBS), said: "The GSE servicers will continue to have to fund significant obligations. In addition, the GSE servicers are one slice of the non-bank market. State regulators maintain the call for the Federal Reserve and Treasury to establish a credit facility as a backstop to ensure servicers have access to predictable and reliable funding to avoid breakdowns in the mortgage finance system. State regulators' primary focus is on protecting consumers. When this crisis has passed, we will continue to build on longstanding work on enhanced prudential regulatory standards for the nonbank servicers regulated by the states."
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