“It’s going to be a liquidity tsunami:” Mortgage firms gear up for missed payments

Nonbanks lenders could be on hook for $100B in event of widespread loan forbearance

Mar.March 24, 2020 09:31 AM
Nonbank mortgage lenders could be left holding the bag for as much as $100 billion in late payments (Credit: iStock)

Nonbank mortgage lenders could be left holding the bag for as much as $100 billion in late payments (Credit: iStock)

While historically low interest rates may present a golden opportunity for the issuance of new mortgages, the economic disruption caused by the coronavirus pandemic spells trouble for millions of existing mortgages as borrowers fall behind on payments.

If one quarter of borrowers seek “forbearance” agreements allowing them to push back mortgage payments by six months or more, the Mortgage Bankers Association estimates that mortgage companies will be on the hook for at least $75 billion on short notice, and possibly more than $100 billion.

“It’s going to be a liquidity tsunami,” Mr. Cooper CEO Jay Bray told the Wall Street Journal. Mr. Cooper, along with Quicken Loans, is one of the largest such nonbank lenders, which have ramped up their involvement in the home loan market following the financial crisis.

The Mortgage Bankers Association is now lobbying Congress and the Trump administration to set up a lending facility that can help make up for the shortfall, which is “is beyond the capacity of the private sector alone to support,” the industry group’s CEO wrote in a letter to Treasury Secretary Steven Mnuchin and Federal Reserve Chairman Jerome Powell.

With thinner capital buffers than traditional banks, nonbank mortgage lenders have long been a source of concern among academics and regulators who doubt their ability to withstand a crisis — even if no one could have predicted the coronavirus pandemic.

“We’ve seen this coming since at least 2016 as the agency market shifted to entities dependent on short-term liquidity, lacking any capital,” Karen Petrou, head of regulatory advisory firm Federal Financial Analytics said. [WSJ] — Kevin Sun

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