Opinion

Overlooking Aid to Mortgage Lenders May Collapse Housing Market

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Posted: Mar 24, 2020 12:01 AM
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Overlooking Aid to Mortgage Lenders May Collapse Housing Market

Source: AP Photo/Elise Amendola

Congress is in the middle of negotiations on a coronavirus stimulus bill intended to provide help for businesses and individuals in dire need of cash. One goal is to provide a financial band-aid to provide a bridge past this crisis and to put the American economy as close as possible to how it looked before the crisis. The pending $1.8 trillion stimulus should help, yet there is the possibility that a new housing crisis may occur if Congress does not handle that aspect of the stimulus properly.

One danger is that we are facing another housing crisis – similar to the 2008 mortgage crisis that may lead to a new long-lasting recession.

While renters and homeowners fear that the disruption of their income is going to lead them not being able to pay rent and mortgages, the Federal Housing Finance Agency (FHFA) has taken action to prevent foreclosures and evictions.  Market Watch reported this week that the FHFA “is suspending all foreclosure actions and evictions for at least 60 days because of the coronavirus national emergency” for loans backed by Fannie Mae or Freddie Mac. The suspension of payments for up to 12 months is tied to the economic hardship of the coronavirus economic displacement.

Ginnie Mae programs service residential mortgage loans, targeting low and middle-income Americans, minority communities and first-time home buyers.  These programs are another aspect of the housing market that needs to be addressed. Not addressing this program in the coronavirus stimulus bill might lead to another meltdown in the economy caused by the housing market. 

There are two ideas seem to make sense under current circumstances to be included in the coronavirus stimulus bill. First is the standard forbearance program that defers interest and principal payments for six months or more, consistent with how the federal government is treating Fannie and Freddie. Providing a funding facility to servicers is a temporary solution to allow the financial system to continue working and should not be considered a bailout. It is more so a way to provide a bridge out of this crisis.

The second idea is to provide access to third-party liquidity to the mortgage servers to make up for the lost money. Ginnie Mae has required payments to investors, taxing authorities and others to cover for the delinquent borrowers. This would require a change to the acknowledge agreement with loan servicers and would make the agreements consistent with the way Freddie and Fannie have access to third party liquidity. This well help to advance tax and insurance payments for homeowners while they are not paying.

Ginnie Mae borrowers accounts for about $2 trillion of single-family mortgages and about 12 million borrowers. The ripple effect to the economy of a disruption of these financial loans would be devastating for the whole economy. We live in dangerous economic times and if one sector of the economy goes into a tailspin, there will be an economy wide recession like we saw back in 2007.

It should be easy for Congress to understand that they don’t want to pass legislation that may cause the next housing crisis.  One way is to study history and learn from it. The Balance in a piece published in December of last year described the 2007 mortgage meltdown as “Hedge funds and banks created mortgage-backed securities. The insurance companies covered them with credit default swaps. Demand for mortgages led to an asset bubble in housing. When the Federal Reserve raised the federal funds rate, it sent adjustable mortgage interest rates skyrocketing.” These actions caused home prices to plummet and massive defaults by borrowers. 

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The mortgage market meltdown lead to a banking crisis and a recession.  The same could happen today if the housing market is disrupted in a way that cuts off payments to servicers of mortgage loans and renters. This is a classic case of Congress coming up with a comprehensive solution to the economic disruption of the coronavirus crisis, yet creating new unintended consequences that might hurt an economic recovery.

These are complicated times and with Congress rushing to the finish line for a massive $1.8 trillion coronavirus stimulus bill they need to make sure they don’t ignore any systemic problems that may cause a new meltdown of the housing market and another 2008 style recession.