While the stimulus package gives suddenly unemployed homeowners some breathing room, mortgage lenders have no such relief. Watch out
Just weeks ago, U.S. mortgage lenders were predicting the biggest spring in years for home sales and refinances …
Today, if steps aren’t taken, the industry is facing mass bankruptcies.
On Friday, we looked at semiconductors and telemedicine, two sectors positioned in strength in the midst of the COVID-19 crisis. Today, let’s turn our gaze to one sector that’s facing massive headwinds …
U.S. non-bank mortgage lenders.
***Mortgage lenders are preparing for a tsunami of delinquencies … to the tune of 15 million U.S. defaults
As we all know, widespread business closures and tight social restrictions to curb COVID-19 have left millions of homeowners jobless, and therefore unable to pay mortgages.
Given this, the stimulus bill signed by the president two weeks ago allows a homeowner with a federally backed home loan to apply for 180 days of loan forbearance if COVID-19 is the cause of the economic hardship.
This doesn’t let the homeowner off-the-hook for the payments, it’s more of a temporary “pause” button for up to six months.
But while this will provide a bit of breathing room for the homeowner, it leaves mortgage servicers stuck with billions in losses.
And as for that “pause” button, well, these mortgage companies don’t have one. They’re still contractually obligated to continue sending money to investors who buy mortgage bonds — not to mention the tax authorities and insurers.
If this isn’t addressed and fixed — and soon — the fallout could be massive. From The Hill:
Industry advocates warn that without a federal intervention, an extended downturn could set off a chain of economic and financial crises akin to the 2007-08 panic and recession. Without a steady stream of mortgage payments, servicers will be unable to pay investors who purchased bonds funded by the revenue from thousands of mortgages packaged together …
Allowing the mortgage industry to crumble could trigger another devastating cycle of foreclosures and bond market crises as investments seen as safe fall apart under an unprecedented financial shock.
***But weren’t the banks subjected to stricter lending standards after 2007/2008 in order to prevent this?
To make sure we’re all on the same page, let’s review some history.
It wasn’t long ago that mortgage lending was the domain of the big banks. However, in the wake of the 2007/2008 crisis, the U.S. government tightened its bank oversight to try to prevent another housing meltdown.
This curbed mortgage-lending profitability for some of the big banks, as the business became increasingly about low margins and high volume. So, some banks simply pulled back on lending.
The ensuing lending-vacuum helped created the non-bank lending industry. These businesses aren’t required to hold the same levels of capital as banks (since they’re not regulated in the same way as banks).
In recent years, as we’ve seen low interest rates and a strong economy, non-bank lenders have done well, and the industry has expanded.
But many non-bank lenders have never seen a sudden market-collapse like this. They simply weren’t around back in the housing crisis. And today, it’s unclear whether they have the cash reserves to ride out a tidal wave of non-payments.
***But wait — what about government-backing? Where are Fannie Mac and Freddie Mac in all this?
For any readers less aware, usually, a non-bank lender will originate a slew of loans, then bundle and sell them to the bond market. But this happens after the bundle has been insured by the government agencies of either Fannie Mae (the Federal National Mortgage Association) or Freddie Mac (the Federal Home Loan Mortgage Corporation). This government-backing helps provide stability to the mortgage market.
Now, today, millions of homeowners suddenly can’t pay their mortgages. Yet, as we noted earlier, these non-bank lenders are still on the hook to pay their bondholders, insurers, and tax authorities.
Enter Fannie Mae and Freddie Mac. These government-backed agencies should reimburse the lending institutions (not all of them, mind you) — but in the real world, there’s a time-lag. And that spells trouble for many lenders staring at a sudden, massive cash crunch.
The Mortgage Bankers Association estimates that if just 25% of homeowners ask for forgiveness on their payments for six months, it could cost lenders more than $75 billion.
Quicken Loans is one of the largest non-bank lenders in the U.S. Here’s how its CEO put things last week:
If a large percentage of the servicing book — let’s say 20-30% of clients you take care of — don’t have the ability to make a payment for six months, most servicers will not have the capital needed to cover those payments.
If this happens, it could seize up the entire lending/housing sector — like oil drained from an engine, causing it to lock.
Were this to happen, the demise of the mortgage-service industry would have enormous implications for the larger housing market, as well as the overall economy.
Two weeks ago, Treasury Secretary Mnuchin formed a task force within the Financial Stability Oversight Council (FSOC) to address how to ease this cash crunch and prevent a meltdown. Mnuchin had asked his task force to offer recommendations by March 30, but as I write, no such recommendations have come.
***Investors have noticed — take IMPAC Mortgage Holdings (IMH)
IMH operates as an independent residential mortgage lender. As we stare down this tsunami of missed mortgage payments, investors are fleeing IMH.
The below chart is as-of last Friday. Over the last month, while the S&P has fallen 10%, IMH has been gutted 79%.
The pain is also hitting mortgage REITs (real estate investment trusts). Below is New York Mortgage Trust, losing 81% over roughly the same period.
If Mnuchin’s task force does its job and addresses this challenge soon, the hope is investors will regain confidence in mortgage lenders. If so, there will be some fantastic buying opportunities coming our way.
But for now, the solution out of this crisis isn’t known so risk levels in this sector remain high.
Bottom line, stay away for the time being. But keep it on your radar.
We’ll continue to keep you up to speed here in the Digest.
Have a good evening,
Jeff Remsburg
