Due to the impact of the coronavirus pandemic on the U.S. economy, mortgage servicers are facing a pending avalanche of defaults which, in turn, could put them in a serious liquidity crunch.
The U.S. Department of Housing and Urban Development/Federal Housing Administration, as well as the Federal Housing Finance Agency, regulator of Fannie Mae and Freddie Mac, have instituted mortgage assistance programs for borrowers impacted by the coronavirus national emergency. That includes suspending foreclosures and evictions for at least 60 days and offering forbearance plans to reduce or suspend mortgage payments for up to 12 months.
The question, however, is whether servicers will have adequate operating capital to advance principal and interest (P&I) payments to bondholders during the deluge of defaults.
To help counter this impact, Ginnie Mae has instituted a program whereby it will cover the difference between what its servicers owe and the funds they have on hand.
However, the agency has advised its servicers that the program should only be used as a last resort.
“We have heard from our issuer and servicing partners that borrower forbearance arrangements that are nationwide in scope could place an enormous strain on issuers,” says Seth D. Appleton, principal executive vice president of Ginnie Mae, in a statement in the Ginnie in Brief blog. “This strain would be caused by the immediate need to advance required pass-through payments to investors, or other entities entitled to receive payments, and the later reimbursement of those advances by borrowers or the agencies who insure the loans (HUD, VA and USDA under the Ginnie Mae program).
“Please know that we are taking action to address these concerns and potential liquidity challenges faced by Ginnie Mae issuers,” Appleton says. “Ginnie Mae has the authority to make changes to the requirements of our program, and we are using those powers to tailor the existing disaster pass-through assistance programs to more suitably scale to the needs of this National Emergency.”
The Mortgage Banking Association estimates that if 25% of eligible borrowers seek forbearance, it would create a $12 billion-a-month gap for servicing companies to fill.
“Ginnie Mae fully anticipates implementing within the next two weeks, via an all participants memorandum (APM), a pass-through assistance program (PTAP) through which issuers with a P&I shortfall may request that Ginnie Mae advance the difference between available funds and the scheduled payment to investors,” Appleton says. “This PTAP will be effective immediately upon publication of the APM for Single Family program issuers, with corresponding changes made to Ginnie Mae’s MBS Guide in due course. We anticipate publishing PTAP terms for HMBS (reverse mortgage) and Multifamily issuers shortly thereafter.”
Appleton explains that PTAP is a program generally reserved for when natural disasters strike – but that the pandemic qualifies.
“To be perfectly clear, borrowing under the PTAP should be a ‘last resort’ financing option to alleviate a liquidity shortage faced by any Ginnie Mae issuers,” he says. “PTAP’s purpose will be to support the forbearance and loss mitigation programs of our insuring agency partners (FHA, VA and USDA) by minimizing potential disruption in the mortgage servicing market so that those federal mortgage insurance and guarantee programs can be administered efficiently and with maximum help to borrowers.”
“Ginnie Mae will choose to make these advances only where doing so will further the program mission and the American taxpayers who stand behind it,” he says.
Appleton further adds that Ginnie Mae recently acted to facilitate electronic execution and transmission of certain pooling documents and delayed submission requirement for audited financial statements from issuers.
“We are also expediting our digital collateral initiative, and in the near future Ginnie Mae expects to publish information about forbearance of sanctions for violation of liquidity and delinquency standards attributable to the COVID-19 crisis,” he says.