FHFA gives unexpected relief to servicers

by Ryan Smith22 Apr 2020

After weeks of housing advocates and industry groups calling for the government to provide a liquidity backstop to servicers providing COVID-19 relief to borrowers, the Federal Housing Finance Agency has responded. However, the agency is taking a different tack than that recommended by industry groups.

Servicers providing federally mandated forbearance to borrowers are still required to advance payments to bond investors. With more than 2.9 million mortgages already in forbearance due to the COVID-19 outbreak – a number only expected to grow – servicers could face a shortage of liquidity. With that in mind, dozens of industry groups and fair-housing advocates have demanded that the government provide a liquidity facility for servicers.

Instead, the FHFA has announced a limit to the number of scheduled payments a servicer is obligated to advance. According to an announcement made Tuesday by the agency, once a servicer has advanced four months of missed principal-and-interest payments on a single-family mortgage loan, that servicer “will have no further obligation to advance scheduled payments.” The rule applies to all Fannie Mae and Freddie Mac loans, the FHFA said.

“The four-month servicer advance obligation limit for loans in forbearance provides stability and clarity to the $5 trillion enterprise-backed housing finance market,” said FHFA Director Mark Calabria. “Mortgage servicers can now plan for exactly how long they will need to advance principal and interest payments on loans for which borrowers have not made their monthly payment.”

Earlier this month, Calabria appeared to dismiss the idea of providing a liquidity facility.

The FHFA also instructed Fannie and Freddie to maintain loans on COVID-19 forbearance plans in mortgage-backed security pools for at least the duration of the forbearance plan. Loans that are delinquent by more than four months were historically purchased out of the pools by the GSEs.

While industry groups welcomed the FHFA’s announcement, some said the four-month limit did not go far enough to address servicers’ liquidity concerns.

“While this news reduces servicers’ worst-case cash flow demands considerably, we continue to stress the need for the Treasury and the Federal Reserve to create a liquidity facility for those servicers who need it in order to continue to make payments to investors, municipalities and insurers on behalf of borrowers who have been granted forbearance required under the CARES Act,” said Robert D. Broeksmit, president and CEO of the Mortgage Bankers Association.