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Fannie, Freddie Regulator Moves To Ease Cash Crunch At Mortgage Servicers

Servicers were on the hook for as long as a year’s worth of payments on mortgages on forbearance. That has been capped at four months. Fannie, Freddie Regulator Moves To Ease Cash Crunch At Mortgage Servicers

A top U.S. regulator took a step to help struggling mortgage lenders contend with a cash crunch as millions of Americans suspend monthly payments on their home loans.

The Federal Housing Finance Agency said Tuesday it would cap at four months the period of time mortgage companies are on the hook to make monthly payments on behalf of borrowers who are in arrears.

The move provides some relief to the mortgage companies, such as Quicken Loans Inc. and Freedom Mortgage Corp., that collect payments from homeowners and pass them on to investors in securities backed by the loans. The companies, which both originate and service home loans, must pay investors even if borrowers stop making payments.

“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,” FHFA chief Mark Calabria said in a statement.

As part of the $2 trillion coronavirus stimulus package, the federal government allowed homeowners harmed by the outbreak to suspend payments for as long as a year without penalty. As of April 12, 5.95% of home loans were in forbearance, up from 3.74% on April 5, according to data released by the Mortgage Bankers Association on Monday.

Separately, the FHFA is also weighing whether to allow Fannie Mae and Freddie Mac, the government-controlled mortgage-finance giants, to buy home loans that recently entered forbearance, The Wall Street Journal reported Monday.

The agency, which oversees Fannie and Freddie, has so far resisted pressure from members of Congress to help the mortgage companies. It has said it wants to first see more data on the number of borrowers who are skipping their payments.

Any move to relax Fannie and Freddie’s ability to buy loans in forbearance would help the mortgage companies whose business model depends on their ability to lend to home buyers and then quickly sell the loans to the government-owned mortgage giants.

The strategy was upended recently when Fannie and Freddie announced they would no longer buy loans in forbearance, leaving the debt piling up on the books of the lightly regulated nonbank companies that both originate and service the bulk of home loans in the U.S.

“We are aware of the issue,” said Raphael Williams, a spokesman for FHFA. “Currently, we are working to find out the breadth of the issue and possible solutions.”

Tuesday’s move to cap the number of months the companies must advance payments is designed to ensure Fannie and Freddie’s policies match up.

To date, servicers of Fannie-backed mortgages had been expected to advance up to a year of payments on behalf of borrowers in forbearance, while Freddie had planned to take over servicer payments after four months.

Michael Bright, chief executive of the Structured Finance Association, called Tuesday’s FHFA announcement a “very welcome development” as it lines up the forbearance program with Fannie and Freddie’s historical responsibilities. He added: “Whether this is sufficient will now depend on how high the forbearance numbers get.”

Some industry officials say difficulties faced by mortgage servicers helped fuel uncertainty over the cost of servicing new mortgages, causing a tightening of lending standards that has made it difficult for all but the most creditworthy borrowers to get a home loan.

Updated: 4-23-2020

Housing Regulator Moves To Ease Crunch At Mortgage Companies

Fannie Mae, Freddie Mac will buy mortgages they typically wouldn’t—and will charge a hefty fee.

The federal agency that oversees the bulk of the U.S. housing market is stepping in to help cash-starved mortgage firms—but it is exacting a price.

The firms, including companies like Quicken Loans Inc. and Freedom Mortgage Corp., have been stuck with mortgages they would typically sell, as borrowers suspend payments amid the economy’s pandemic-driven downturn.

The Federal Housing Finance Agency said Wednesday that mortgage firms can sell some of those loans to Fannie Mae FNMA 2.29% and Freddie Mac, the government-controlled companies that buy mortgages and package them into securities.

“Purchases of these previously ineligible loans will help provide liquidity to mortgage markets and allow originators to keep lending,” FHFA Director Mark Calabria said in a statement.

Industry officials praised the regulator’s move but suggested that fees Fannie and Freddie will charge for the purchases—from 5% to 7% of a loan’s value—were high and should be subject to negotiation.

“The new fees attached to the sale of loans may be cost-prohibitive for many credit unions and limit affordable loan options for home buyers,” Dan Berger, chief executive of the National Association of Federally Insured Credit Unions, said in a statement.

Like banks and nonbank mortgage companies, credit unions originate loans that they sell to Fannie and Freddie

Bob Broeksmit, chief executive of the Mortgage Bankers Association, said the move was “an important first step but more needs to be done,” both on pricing and on including all types of loans.

The loans will be priced “to mitigate the heightened risk of loss” to Fannie and Freddie, the FHFA statement said.

Fannie and Freddie don’t make loans but instead buy them from lenders and package them into securities that are sold to other investors.

Industry officials were anticipating federal action to help banks and mortgage companies that typically lend to home buyers and then quickly sell the loans to Fannie and Freddie. Their business model was upended recently when Fannie and Freddie said they wouldn’t buy loans in so-called forbearance—meaning borrowers have stopped making payments.

The officials said they were working to quantify the number of loans stuck unsold on companies’ books.

The problem stems from the stimulus package passed by Congress last month. The law allows homeowners to suspend payments on government-guaranteed loans for as long as a year without penalty if they suffered a hardship related to the coronavirus pandemic.

Historically, Fannie and Freddie haven’t bought loans that were in forbearance. The new policy, which was reported earlier by The Wall Street Journal, will apply to loans to buy new homes and some refinanced mortgages that lenders were preparing to sell to Fannie and Freddie.

Some mortgage executives said the FHFA’s move would provide certainty to lenders seeking to sell loans stuck on their books.

“It’s not the price that you’d want,” said Mat Ishbia, chief executive of United Wholesale Mortgage, but he described the FHFA’s decision to provide support as “more than fair.”

Fannie and Freddie charge fees to guarantee loans and they can assess fees on risky loans; but the charges are generally assessed at the time the loan is approved, not after, according to housing experts. They are also generally much lower: The largest single “loan level price adjustment” listed by Fannie is 4.125%, for investment properties with less than a 3% downpayment

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