US non-bank lenders, which originate half of America’s home loans, are facing financial pressure and ratings downgrades as they await clarity from the federal government about how to deal with mortgage payment forbearance.
Rating agency Moody’s switched its outlook for non-bank mortgage lenders in the US from “stable” to “negative” on Thursday, warning of the “intense” liquidity pressures.
“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 capitalisation and asset quality,” the analysts wrote.
The non-bank lenders typically make loans that they then bundle and sell into bond markets, once the bundles have been insured by Fannie Mae and Freddie Mac, which are backed by the government.
But the lenders continue to act as servicers on the loans. If unemployed borrowers exercise their right to forbearance — as authorised by the recently passed stimulus law — servicers still must make the principal and interest payment to bondholders. Fannie and Freddie ultimately reimburse the servicers, but at a lag, creating the potential for cash crunches.
Michael Fratantoni, chief economist of the Mortgage Bankers Association, predicted that these sums owed by lenders will quickly shoot into the billions. “If there is a 25 per cent uptake of these forbearance programs, it [will leave a gap] of $12bn per month,” he said. “Some [non-bank lenders] are able to do that for a short period of time, but none are able to do it for a long period of time.”
Mortgage lenders say that the Federal Reserve needs to step in and provide liquidity to help them bridge the gap, but they are still awaiting clarity on how that relief might be structured.
“We have to get a liquidity solution now,” said Jay Bray, chief executive of Mr Cooper, a non-bank home lender based in Dallas, Texas. “We have to remit payments on a monthly basis and those are typically in the middle of the month. This has to be put in place now.”
Steven Mnuchin, the US Treasury secretary, said last week that fixing this problem was a priority, calling together a task force to present solutions to the Financial Stability Oversight Council by March 30, but so far nothing has been announced.
Fannie and Freddie guarantee payments on more than $5tn of US mortgages. Ginnie Mae, another US government agency that guarantees $2tn of mortgage-backed securities, offered some relief to mortgage servicers last week, activating a program typically used after natural disasters to cover their payments on a temporary, emergency basis.
Freedom Mortgage, one of the US’s largest non-bank mortgage lenders, was downgraded by Fitch Ratings last week. Its chief executive, Stanley Middleman, said the company has enough cash on hand from a recent burst in mortgage refinancing to get by for a short while, but echoed the call for a solution from the Fed. “If this persists over time, we could use the government’s help,” he said.
Moody’s also had concerns about how coronavirus will hit the profitability of the sector and therefore capital levels at some of the companies, particularly since delinquent mortgages cost more to service.
“Crisis-related market volatility and limits on production are eroding the already modest current profitability of non-bank mortgage companies,” its report said, although it added activity would snap back after stay-at-home orders are lifted and help drive a recovery in earnings in late 2020.
Mortgage applications from people buying homes are likely to decline soon, said Sanjiv Das, chief executive of Texas-based Caliber Home Loans. “Fewer people are visiting houses, there is trouble with appraisals. Those factors, as super-early leading indicators, are clearly showing a slowdown . . . I expect a sharp drop in purchases in the coming months.”
But he added mortgage refinancing activity “continues to be very strong”.
Mr Das said he expects Washington to reinforce the chain leading from borrower to bondholder before it breaks. “In Washington, the table has been pounded very hard on this. I don’t think the forbearance link will fail.”