Could the $2trn stimulus package cripple the mortgage industry?

by Ryan Smith30 Mar 2020

The federal government’s $2 trillion stimulus package could be a boon to homeowners struggling with the economic impact of the COVID-19 outbreak – but it could also cripple the mortgage industry unless the Federal Reserve steps in, according to a new analysis.

Among the provisions in the stimulus package is one that will allow homeowners affected by the crisis to postpone mortgage payments for up to 12 months, according to a report by CNN Business. The provision is there to prevent the job losses caused by the crisis from setting off an avalanche of foreclosures – which in turn would crash the real estate market and worsen the economy even further.

Under the bill passed by the Senate, borrowers who have a financial hardship directly or indirectly caused by the coronavirus could request mortgage payment deferrals for 180 days. That deferral could then be extended another 180 days.

However, those missed mortgage payments could cause a severe cash shortage in the mortgage industry, according to CNN Business. Even after granting homeowners mortgage forbearance, servicers are still obligated by investors to continue to pay principal and interest on the mortgages. Servicers are also required to continue making payments to mortgage insurers, property insurers and local tax authorities, CNN Business reported. Unless the Fed steps in with more emergency lending, servicers simply won’t have enough cash on hand to cover the missed mortgage payments – and if servicers start defaulting, it could cripple the real estate finance industry.

“It would be complete contagion,” Jay Bray, CEO of Mr. Cooper, told CNN Business. “It would turn into a housing crisis.” Mr. Cooper told CNN Business that it projects that one in four Americans could eventually request mortgage payment deferrals.

The Federal Reserve is widely expected to step in with more emergency lending to avoid the situation, CNN Business said.