The Biden administration’s extension of a moratorium on foreclosures is getting mixed reviews locally.
Representatives of mortgage holders welcomed the move to hold off on foreclosures for federally guaranteed mortgages and forbearance of mortgage payments, but said more is needed.
Nancy Wallace, a business professor at the University of California at Berkeley, said a question remains about where the money will come from to compensate the holders of mortgage-backed securities if a sizable portion of mortgage holders ultimately default because of the pandemic.
There are 2.7 million homeowners in pandemic forbearance and 10 million homeowners behind on mortgage payments nationwide, the White House said in announcing the move last week.
“It’s great because it tells the banks they have to do this for the landlords,” said Joby Tapia, secretary of the Marin Rental Property Association.
However, Tapia said, the Biden administration has failed to provide any guarantees that lenders won’t penalize mortgage holders who delay making payments later when they seek to refinance or seek a new loan.
“Until they get some kind of compensation,” Tapia said, “the landlords are still bearing the brunt of the subsidization of this economic crisis that we’re going through.”
Tapia said he recently spoke with a Marin landlord who has received four months of forbearance on her mortgage loan. She told him that three of her seven residences were vacant for more than four months during the pandemic, and she still has one vacancy.
Alex Khalfin, a spokesman for the California Apartment Association, said, “Unfortunately, the protections against foreclosure extended by the president won’t apply to the vast majority of California rental housing providers at risk of foreclosure due to COVID-19 and months of missed rental payments. Only a fraction of mortgages for rental properties are federally guaranteed.”
Khalfin said when foreclosure protections do apply, they will give homeowners some breathing room.
“But those mortgage payments will come due,” he said, “as will the risk of default.”
The Biden administration has extended the foreclosure moratorium for homeowners — formerly set to expire at the end of March — through June 30. It also provided up to six months of additional mortgage payment forbearance to borrowers who entered forbearance on or before June 30 and extended the window for new forbearance enrollment until June 30.
Wallace is concerned that “non-bank” lenders, who are responsible for collecting mortgage payments and using the money to pay principal and interest to holders of mortgage-backed securities, will run out of money.
Most big banks scaled back their residential mortgage businesses after losing lots of money servicing defaulted mortgages following the 2008 financial crisis. After the crisis, banks were slapped with more stringent capital requirements.
Non-bank lenders — companies such as Quicken Loans, Mr. Cooper Group and Freedom Mortgage — took their place.
“Most of the (debt) servicing in the United States right now is held by non-banks,” Wallace said. “They are the ones that are in a potential squeeze.”
She said the Federal Reserve temporarily rescued the non-banks last year by lowering interest rates and printing more money. Those moves set off an enormous refinance boom that led to massive purchases of government-guaranteed mortgage-backed securities.
“Now that refi boom is over and interest rates if anything are likely to go up,” Wallace said. “So the fee business that has sustained the non-bank sector is going to be much reduced.”
During the refinance boom, many of the non-banks — firms such as Rocket Companies, the parent of Quicken Loans, and Guild Holdings — went public.
“A lot of the principals in these firms have cashed out by hustling a sale of their stock,” Wallace said. “So the big worry is who is going to cover the servicing on the bonds.”
“Even with the initial public offerings, these firms are not well-capitalized,” she said. “And the business model is not really understood, nor is it really viable.”
Wallace said the non-banks are reporting that 10% of mortgage loans are in forbearance and 5% are delinquent, but she says the number of delinquencies could well prove to be higher.
“The data is murky,” she says.
Wallace said both the Biden administration and the Trump administration have responded appropriately.
“We could not allow for a massive failure of the U.S. mortgage market,” she said. “The effect on employment would be devastating. We need to find a glide path out of this situation, and I haven’t heard very many policies about how we’re doing to handle that.”