THE BASIS POINT

CNN’s Matt Egan did a great job summarizing the conundrum in mortgage relief. I already detailed how lenders can pause your mortgage payments if you’ve got coronavirus hardship. But even if lenders agree to let you not pay for awhile, they still have to pay investors and other entities backing your loans. This will cause material hardship for lenders. And they’re going to need a bailout. Below are key excerpts from the article, and above is the link.

The $2 trillion stimulus package [and last week’s relief] that passed the US Senate Wednesday will allow homeowners hurt by the health crisis to postpone mortgage payments for up to 12 months. But that wave of missed mortgage payments threatens to spark a crippling cash crunch in the real estate finance industry unless the Federal Reserve steps in with even more emergency lending.

The problem is that mortgage servicers, even after granting homeowners forbearance, are still on the hook with investors to continue paying principal and interest on the mortgages. They also must make payments to mortgage insurers, property insurers and local tax authorities. And that could be a hefty sum given the economic carnage caused by the coronavirus pandemic.

Initial claims for unemployment benefits skyrocketed to record highs.

Mortgage servicers don’t have enough cash to cover the coming wave of missed mortgage payments. And a series of defaults by servicers would cripple a key part of the economy.

Robert Broeksmit, CEO of the MBA, told CNN Business that if one-quarter of borrowers request forbearance for six months or longer, advancing requirements on mortgage servicers could exceed $75 billion.

“The cash demand from what could be a large spike in missed payments would overwhelm the sector,” Broeksmit said. Broeksmit wrote a letter Sunday to the Federal Reserve and Treasury Department requesting authorities “urgently and swiftly” develop a lending facility for mortgage servicers.

“You would see widescale failures within the servicing system,” said Ed Mills, Washington analyst at Raymond James. “That would raise real questions about the plumbing of the housing finance system going forward.”

The mortgage industry, like many others, is turning to the Fed to invoke emergency powers and serve its role as the lender of last resort. In this case, the US central bank would provide a line of credit mortgage servicers could draw on to make the payments to mortgage investors on behalf of borrowers.

Analysts expect the Fed to step in soon after the stimulus package becomes law. The House of Representatives is expected to pass the stimulus bill Friday.