In light of forbearance-related risks stemming from the economic impact of coronavirus, Fitch Ratings has placed Freedom Mortgage Corp.’s BB- Long-Term Issuer Default Rating (IDR) and B+ senior unsecured debt rating on Rating Watch Negative.
The ratings firm says Freedom “could experience meaningful strains on its liquidity given the consumer mortgage forbearance programs being proposed by the U.S. government in response to the coronavirus pandemic.”
“Under the current framework,” Freedom “would need to continue to advance principal and interest (P&I) payments to bondholders even as incoming cash flows slow considerably,” Fitch says in an update.
“An increase in servicing advances, to fund the P&I payments, and valuation declines associated with Freedom’s mortgage servicing rights (MSRs), given the decline in rates, could also lead to elevated leverage in the near term,” Fitch says.
“The pressure on the non-bank mortgage sector is particularly acute at present, given more limited funding profiles compared to banks, and could be exacerbated further as an unintended consequence of the government’s mortgage forbearance program,” the ratings firm adds.
Fortunately, the Treasury has upped its bond buying to the max in response to the crisis and an economic aid package is in the works.
“The Federal Reserve [has] announced the relaunch of the Term Asset-Backed Securities Loan Facility (TALF), which will initially provide up to $100 billion in loans that will be fully secured by eligible asset-backed security (ABS) collateral,” Fitch says. “Eligible ABS collateral includes senior tranches of ABS backed by eligible servicing advance receivables, which may provide an avenue for liquidity relief to Freedom.
“However, Fitch believes there is execution risk for servicers trying to access this facility as it would require securitization of servicing advance receivables in a short timeframe,” the firm says. “Additionally, servicers would need to self-fund or raise external financing for retention of junior tranches of securitizations, which presents additional liquidity and execution challenges.”
Fitch says non-bank mortgage companies are particularly at risk in this current environment, as they may not hold enough capital if there is a wave of defaults.
“Fitch believes the highly cyclical nature of the mortgage origination business and the capital intensity and valuation volatility of MSRs of the mortgage servicing business represent primary rating constraints for nonbank mortgage companies, including Freedom. Furthermore, the mortgage business is subject to intense legislative and regulatory scrutiny, which further increases business risk, and the imperfect nature of interest rate hedging can introduce liquidity risks related to margin calls and/or earnings volatility. These industry constraints typically limit ratings assigned to nonbank mortgage companies to below investment grade levels.”