When the Federal Housing Finance Agency announced last month that servicers who collect payments on mortgages backed by fannie mae and freddy mac it will only be required to cover four months of missed loan payments in forbearance, the big question was what happens when that four month period ends.
That’s because neither the GSEs nor the FHFA said who would pay the remaining principal and interest payments those managers must send to investors, but it’s no longer a mystery.
It turns out that the GSEs themselves are preparing to cover the remaining advances while those loans remain in forbearance.
The GSEs disclosed separately this week that they plan to make payments directly to investors for loans that remain in forbearance for more than four months.
Under the CARES Act, a borrower whose mortgage is backed by the government or GSEs who is experiencing hardship related to COVID-19 can request and must be granted a forbearance of up to 180 days, which can then be extended for an additional 180 days. days if necessary.
That created a situation where servicers would theoretically be required to advance late payments to mortgage bond investors for up to 360 days, prompting many servicers and mortgage industry watchers practically beg that the government establish a system supported by the federal government liquidity line for the servers.
But with a potential forbearance period of nearly a year and trustees only obligated for four months of payments, the question of who would make the remaining payments became important.
But it seems that it will be the GSEs that will make those payments.
“In order to provide servicers with stability and clarity regarding their payment obligations and to align our servicer advance requirement with Freddie Mac, FHFA instructions require that, effective August 2020, we cease requiring servicers that prepay scheduled principal and interest payments in arrears after four months of borrower default. payments on a loan,” Fannie Mae said in her 10-Q filing with the National Stock Market Commission.
“After this time, we will make unscheduled principal and interest payments to the MBS trust for payment to MBS holders as long as the loan remains in the MBS trust,” GSE added.
The phrase “so long as the loan remains in the MBS trust” is important considering that the GSEs will not purchase loans in forbearance from the MBS pools.
Under previous GSE policies, GSEs purchase mortgages that are more than four months past due from MBS pools. But, under a new policy announced last month, GSEs will hold forbearance loans in their respective MBS pools “for at least the duration of the forbearance plan.”
Therefore, loans in forbearance will remain in the MBS pool while they are in forbearance. And the GSEs are maneuvering to cover those remaining payments, for as long as it takes.
Each of the GSEs posted significantly lower earnings in the first quarter than in previous quarters, as each is moving to hedge against those credit problems.
“We also maintained excess liquidity during the first quarter of 2020 due to volatile market conditions caused by the COVID-19 pandemic, which may negatively affect our net interest income,” Freddie Mac said in its 10-Q report. before the SEC. “In addition, we expect to advance significant amounts to cover payments of principal and interest to security holders for loans in forbearance in the coming months.”
In his SEC filing, Freddie Mac said he expects serious delinquency rates and the volume of loss mitigation activity to “increase significantly” as a result of COVID-19-related closures and job losses, which will take the GSE to have to pay bondholders directly for late payments.
“The pandemic and forbearance programs will also cause a significant increase in our allowance for credit losses,” Freddie Mac said. “We had a $1.2 billion provision for credit losses in the first quarter of 2020 due to our forecast of higher expected credit losses. of our single-family loan guarantee portfolio as a result of the pandemic, but these estimates are subject to significant uncertainty and may increase substantially in the future depending on the depth and severity of the economic downturn caused by the pandemic.”
Fannie Mae also raised concerns about the issue in its filing with the SEC.
“If a large number of single-family or multi-family borrowers default on their mortgages as a result of the economic dislocation caused by the COVID-19 outbreak, our servicers may not have enough liquidity to advance missed payments to MBS trusts” Fannie said Mae. “In such an event, we would be required to make the payments, which could require us to obtain substantial additional financing.”
Both GSEs have billions of cash on hand, the bottom line of each company being allowed increase its capital cushion to a combined $45 billion. Under the terms of the Preferred Stock Purchase Agreements that went into effect when the government took the GSEs into trusteeship, Fannie and Freddie used to send dividends to the Treasury each quarter that are profitable.
but that changed late 2017 when the FHFA began allowing GSEs to keep some capital.
Then last year, the government announced that it was increasing the amount that GSEs could withhold from the Treasury. The movement almost ended with the net worth sweep, at least until the GSEs accumulate their permitted capital reserves. Under the agreement between the GSEs, Treasury and FHFA, Fannie Mae may have a capital reserve of $25 billion, while Freddie Mac may have $20 billion.
As of March 31, 2020, Fannie Mae has a net worth of $13.9 billion, while Freddie Mac has a net worth of $9.5 billion.
That means the GSEs will likely be able to cover late payments for some time, but each company raised some concern about their ability to cover payments over an extended period.
“In addition, we expect our debt financing needs to increase in future periods, as significantly higher loan delinquency rates and an increase in forbearances and other loss mitigation activities driven by the COVID-19 outbreak they force us to finance larger amounts of principal, interest, tax and insurance payments on non-performing loans and to purchase a larger volume of non-performing loans from MBS trusts,” Fannie Mae said.
“Our provision for credit losses has increased significantly, and we expect single-family home serious delinquency rates and the volume of loss mitigation activity to increase significantly in the near term as a result of the COVID-19 pandemic and forbearance programs. that we have announced. ”, said Freddy Mac.
“While we hope that the measures we have taken to support mortgage markets as a result of the COVID-19 pandemic will improve outcomes for borrowers, these measures may not be as successful as we hope,” Freddie Mac continued. , these actions may adversely affect our financial condition and results of operations, perhaps materially. The ultimate success of these programs will depend on the length and severity of the economic downturn.”