Non-bank companies that service mortgages — part of the backbone of the residential mortgage-backed securities market — are in a bind.
These companies are struggling under requirements that they pass mortgage payments, including principal, interest, property taxes, and insurance, on to investors in RMBS, even when homeowners aren’t paying their mortgages.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act requires companies to give some virus-affected borrowers up to 360 days to pay their mortgages. In early April, Moody’s changed its outlook for the non-bank residential sector from stable to negative.
According to a recent report on the non-bank residential mortgage sector, Moody’s believes the largest servicers, such as PennyMac Mortgage Investment Trust and Quicken Loans, have enough cash to make these payments over the next few months or more.
“However, without a material increase in funding facilities, liquidity challenges will increase, particularly for financially weaker servicers,” said credit ratings agency in its report.
But sources in the credit markets said a bailout isn’t necessary as these companies don’t pose a risk to the system. “It’s just all about, ‘I want my bailout,’” the source said.
Since March, Moody’s reported that non-bank mortgage companies have faced cash challenges from margin calls on secured funding and other facilities.
With unemployment claims rising to 30 million on Thursday, Moody’s expects more people to apply for what’s called mortgage forbearance as they face May 1 payment deadlines.
There’s also some good news. “Beyond May, we expect the increase of loans in forbearance to decelerate as the rate of increase in unemployment slows,” said the authors of the study.
Only Ginnie Mae has said it will create a funding facility for liquidity problems popping up at mortgage companies servicing its loans, Moody’s noted. As a result, servicers are largely left to deal with these issues on their own, which Moody’s says is “credit negative” for the sector.
The ratings agency suggests that these current problems may be larger even than servicers faced during the global financial crisis. During the GFC, servicers could tap the Fed’s Term Asset-Backed Securities Loan Facility (TALF) program to finance the payments they needed to make even when borrowers could not pay their monthly mortgages.
In contrast, CARES has carve-out for individuals to postpone mortgage payments but no similar liquidity accomodations for servicers.
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After the GFC, banks pulled back from lending and non-bank mortgage servicers grew vigorously.
In March, the price of agency mortgages declined swiftly as companies raced to raise cash. After the Fed expanded its buying of Treasury and agency MBS, the markets settled.
“However, non-agency mortgages and non-agency MBS prices dropped far more than agency mortgages and agency MBS and have hardly recovered given the economic uncertainty,” according to Moody’s.
