MBA Urges Feds to Take Immediate Further Steps on Market Stabilization, Liquidity
The Mortgage Bankers Association on Sunday asked the Treasury Department and the Federal Reserve to take immediate further actions ensure orderly functioning of the housing finance market in response to the “extreme volatility” in financial markets arising from the spread of the coronavirus.
“As businesses and societal institutions are forced to close their doors, millions of households throughout the country will likely find themselves with reduced incomes, which will impede their ability to meet their debt obligations in the coming weeks and months,” wrote MBA President and CEO Robert Broeksmit, CMB, in the Mar. 22 letter to Treasury Secretary Steven Mnuchin and Federal Reserve Chair Jerome Powell. “While it is our sincere hope that the effects of the COVID-19 outbreak are short-lived, it is apparent that there will be at least several weeks of severe disruptions to all facets of our economy. Some of the most significant impacts are occurring with respect to the nation’s system of housing finance.”
In the wake of economic fallout from the coronavirus, the federal government has so far lowered the federal funds rate to zero; established emergency facilities to support liquidity for commercial paper and money market mutual funds; announced large buybacks of mortgage-backed securities; and issued a statement emphasizing flexibility for financial institutions regarding capital, liquidity, and loan modifications
However, Broeksmit said further action by Treasury and the Federal Reserve is needed to “ensure the orderly functioning” of the housing finance market. Specifically, Treasury and the Federal Reserve should:
–Increase the scale and scope of agency mortgage-backed securities asset purchase operations; and
–Develop a liquidity facility to support the mortgage servicing sector in anticipation of widespread borrower payment forbearance.
“We believe these actions should be taken as urgently and swiftly as possible to counter volatility in the market, protect consumers and ensure all market participants that the liquidity strains being caused by COVID-19 do not escalate into solvency problems throughout financial markets,” Broeksmit said.
The letter noted the market for agency MBS has exhibited high levels of liquidity, trailing only the market for U.S. Treasury securities in terms of trading volume and many other common measures of liquidity. “This liquidity is a key driver of investor demand, which raises asset prices and lowers the interest rates that American homeowners pay on their mortgages,” MBA said. “As such, ensuring the presence of a highly liquid market is, and should continue to be, a public policy priority. In recent days, however, as COVID-19-related fears have shaken confidence among fixed-income investors, the market for agency MBS has become severely dislocated due to uncharacteristic and abnormal levels of illiquidity. Price volatility has led to significant and sudden mark-downs in valuations of agency MBS, which prompted margin calls, thereby leading to asset sales by institutions seeking to raise cash. Transactions at much-reduced prices then led to further sector-wide mark-downs, triggering yet more margin calls. This negative spiral in valuations is producing a market in which sellers far outnumber buyers, liquidity continues to suffer and valuations continue to fall.”
MBA said this secondary market dislocation is flowing into the primary market, with interest rates on both single-family and multifamily mortgages spiking and spreads to Treasury securities widening. “As mortgage interest rates have risen, the ability of homeowners to refinance their loans – a potentially powerful form of stimulus in a recession – has been stalled,” MBA said. “The volatility in the agency MBS market also presents an immediate threat to market participants that are heavily exposed to these securities.”
MBA recommends the Federal Reserve significantly expand its agency MBS asset purchase operations to a level well beyond the $200 billion minimum specified by the FOMC on March 15. “Rather than provide a target for total agency MBS purchases, the FOMC should commit to increasing its purchases to the level necessary to stabilize the agency MBS market and, as a result, mortgage interest rates in the primary market,” MBA said. MBA also recommends the Federal Open Market Committee commit to expanding the scope of its purchases to include these assets and launch a new version of the Term-Asset Backed Securities Loan Facility to help support liquidity for other less-liquid portions of the securitization markets.
“Even an announcement of its intention to accelerate its agency MBS purchases will provide stabilizing signals to the market,” MBA said. “By doing so, the Federal Reserve can arrest the abnormally high volatility in the agency MBS market. It is becoming clearer by the day that such action is necessary to prevent more sweeping dislocations across fixed-income markets and the housing finance system.”
MBA also emphasized the need for a liquid facility to support mortgage servicing, noting while servicer actions such as mortgage payment forbearance will ensure that borrowers not only remain in their homes during this public health scare, it could also result in a “severe liquidity shortage” that would most acutely affect mortgage servicers, who are contractually bound to continue to advance monthly payments to investors, insurers and taxing authorities, regardless of whether the borrower actually made those payments.
“Mortgage servicers maintain liquid reserves to cover these advances when borrowers miss their payments, but virtually no servicer, regardless of its business model or size, will be able to make sustained advances during a large-scale pandemic when a significant portion of borrowers could cease making their payments for an extended period,” MBA said. “The servicer needs enough liquidity to remain in operation and continue to fulfill its critical functions, including remitting property tax and hazard insurance premiums, until the reimbursement occurs.”
MBA estimated if one-quarter of borrowers avail themselves of forbearance for six months or longer, advancing demands on servicers could exceed $75 billion and could climb well above $100 billion.
MBA recommends the Federal Reserve establish a program through its authority under Section 13(3) of the Federal Reserve Act to provide liquidity for the residential mortgage servicing sector. Such a program should be supported by credit protection from Treasury’s Exchange Stabilization Fund.
“A program of this nature would satisfy the requirements of the Federal Reserve Act; it would be developed in response to ‘unusual and exigent circumstances,’ entail lending on a temporary basis to solvent institutions, and provide for “broad-based” eligibility,” MBA said. “Further, the high quality of mortgage underwriting over the past decade, combined with the government or GSE guarantees on the collateral, would minimize any credit risk associated with the program.”