When April began, the country was in an unprecedented situation. We were on week three of federal recommendations to stay at home and socially distance, and a record breaking ten million Americans had applied for unemployment benefits in the prior month. Despite the days blurring together and March feeling like the longest month in history, the first of April came, and for many people, their mortgage payment was due.
If you were one of the ten million Americans across the country facing unemployment or one of countless others who was forced to shutter their small business or experienced a pay reduction, the first of the month likely came with an overwhelming sense of dread.
A Solution for Homeowners
Thankfully, the Federal Government took action, passing the CARES Act which established a program to provide American homeowners with much-needed financial relief. The CARES Act allows homeowners impacted by COVID-19 to request a forbearance plan which essentially allows them to temporarily pause monthly mortgage payments. The payments are due in the future, but the relief is immediate.
While the CARES Act allows homeowners to pause payments, the mortgage servicers who process those payments are still required to continue as if the payments had been made. In other words, the Federal Government is requiring mortgage servicers to advance homeowners’ mortgage payments, including taxes and insurance, out of their own capital. And according to the Mortgage Bankers Association, the total number of loans in forbearance grew from 0.25% to 2.66% between March 2 to April 1, 2020, with a 1,270% increase between March 2 and March 16, and another 1,896% between March 16 and March 30.
It is expected that one in four homeowners will need assistance paying their mortgages for six months. If this proves true, mortgage servicers will need to advance more than a hundred billion dollars to cover the missed payments, an amount far greater than what we experienced during the housing crisis ten years ago.
The Need for Liquidity
While traditional banks are given almost unlimited liquidity through the Federal Reserve Window, non-bank mortgage servicers have fewer liquidity sources available to them, and the CARES Act did not establish a liquidity facility for non-bank mortgage service providers, which service over half of all U.S. homeowners’ mortgages. If these mortgage service providers don't get the support to make these advances on behalf of the government, companies could go under, leaving customers stranded during an already difficult situation.
Congress, rightfully, is allowing Americans to put off paying their mortgage payments, but it is impossible for mortgage companies to survive without liquidity from the government to cover this mandatory cost. These companies aren’t looking for a bailout to be used for executive bonuses or to meet payroll; only that the federal government provides short-term assistance to ensure that the mortgage forbearance program works as intended for all lenders, not just those at the top of the food chain.
This facility is not a loan to mortgage servicers. If anything, this is a loan the government is requiring mortgage servicers to make on their behalf. Similar to the small business loans mandated by the government and being made by banks, a liquidity facility would only serve the end consumer. In this case, its millions of American homeowners desperately hanging on to their piece of the American dream.
If the government refuses to act now to protect the mortgage industry, the entire housing market will be at risk of collapse. The housing market is the foundation of the American economy and its collapse is the last thing we need on top of a global pandemic and potentially record unemployment levels. We do not want a repeat of the 2008 housing crisis, but we run that risk if we do not address this issue quickly.
Thankfully, Treasury Secretary Mnuchin has taken some initial action, recently establishing a task force to confront mortgage firms’ liquidity designed to provide solutions to this very problem. But aggressive action is necessary to stave off the worst possible outcome - the collapse of our housing market.
If we want to ensure that the first of May is not worse than the first of April, the federal government must provide all mortgage companies with the liquidity they need to support American families seeking forbearance plans. Further to the point, it is critical that the government does not create favoritism or a special class that puts undue pressure on small mortgage lenders. While the government rightly ensured that Americans could pause their payments, for this policy to work, the Trump Administration must also ensure that the mortgage service providers stay in business so they can continue to help struggling homeowners.
Robert Graham, who is the former chairman of the Republican Party of Arizona, served as a senior adviser to President Trump’s 2016 campaign, and is former head of RG Capital Equity Lending, a mortgage bank.