House Democrats Add Pressure on Administration for Mortgage Servicing Liquidity
(Published Apr. 24, 2020)
Twenty-seven House Democrats sent a letter last week to Administration officials urging them to take further steps to allow mortgage borrowers to avoid delinquency and to support mortgage servicers who are working with these borrowers.
“We support the steps you have already taken to allow mortgage borrowers to avoid delinquency, and we write today to ask for additional steps to ensure that mortgage markets are able to function smoothly and that homeowners are able to continue to afford their mortgages once the current forbearance period is over,” the letter said.
The letter encourages the Treasury Department; HUD; the Federal Reserve; the Federal Housing Finance Agency; the Department of Agriculture; and the Department of Veterans Affairs to adopt three connected policies:
1. Clear guidance on how to handle the forborne payments at the conclusion of the forbearance period, with an emphasis on ensuring mortgage payments remain affordable;
2. Creation of a liquidity facility that will allow mortgage servicers to fund the payments they must advance to loan owners during the forbearance period; and
3. A requirement that any servicer that makes use of the liquidity facility offers the same forbearance options and post-forbearance modification procedures to all mortgage borrowers, whether or not their mortgages are federally insured.
Additionally, the letter calls for the following steps:
—Liquidity for Mortgage Servicers. The letter emphasized that third-party mortgage servicers are contractually obligated to advance payments to the loan owner when borrowers do not pay, either due to delinquency or forbearance. “As more borrowers take advantage of forbearance, mortgage servicers will increasingly have to step in, and the required advances seem likely to exhaust the cash reserves of many or all of the mortgage servicers,” it said. “We saw in 2008 how failures of mortgage servicers created significant stress on the financial system. Financial stress among mortgage servicers also caused unnecessary foreclosures. There is no reason to risk either of these happening again, especially given the federal government’s good early steps to help homeowners.”
The letter urges the federal government to create a liquidity facility that servicers can draw upon to access the cash they need to make their required advances.
—Modifying Mortgages After Forbearance. As part of developing the liquidity facility, the letter asks federal agencies to provide “certainty and consistency” on when they will repay servicer advances.” It notes
most of the agencies have laid out several different modification paths for their servicers and options vary from agency to agency.
“We support the goal of tailoring each modification to the borrower’s specific situation, but we believe simplicity is a greater virtue when we likely will see millions of Americans exiting forbearance in a narrow window next spring,” the letter said. “This will improve communication to borrowers and reduce the chances that the servicers are overwhelmed and unable to complete modifications borrowers are entitled to, which occurred far too often from 2008 to 2012.”
—Options for Non-Agency Mortgages. The letter noted $4 trillion in single-family mortgages fall outside of the CARES Act scope. It said uniform forbearance and modification options described above should be offered to all homeowners, and the liquidity facility provides the tool to extend this relief. “All servicers should be required to demonstrate compliance with fair lending laws in conducting these modifications,” the letter said.
“[We] support further examination and regulation of capital and liquidity requirements in mortgage servicing,” the letter said. “But for now, the focus must be on urgent action to ensure that we do not face massive disruptions of the mortgage market and that homeowners get the assistance to which they are entitled.”
