Main Content

The Collapse No One is Talking About: CARES Act Causing Mortgage Crisis

Real Estate agents are not talking about it and I cannot understand why.   It might be the single biggest issue facing out industry due to the Coronavirus Pandemic.   This scariest part of this storm is that it is HERE, yet no one seems to know.

Another mortgage storm is possibly on the horizon as millions of U.S. homeowners look at a provision of the new CARES Act that allows for mortgage payment relief for struggling families due to the effects from the Coronavirus.  Below is the exact language:

The CARES Act provides that a Federally backed mortgage loan borrowers who have been (A) current on their payments as of February 1, 2020, and (B) who affirm they are experiencing financial hardship due to the COVID-19 emergency may request a forbearance from loan servicers.

The problem is that there are NO qualifications required to qualify for this mortgage payment relief!  ZERO.  Call up your bank, ask for mortgage payment relief, and you have it.   THAT’S IT!  (How did no one think this would be a problem?) 

This has all led to 1 major problem in the short term, and another major problem coming in 3-6 months.   

 

PROBLEM 1: It has been projected by Mike Fratantoni, chief economist at the Mortgage Bankers Association, that if one-quarter of U.S. homeowners — about 12.5 million households — seek forbearance for six months, servicers could still owe between $75 and $100 billion to investors because some of the government agencies require the servicers to continue to make payments even if the borrower is not making payments. These servicers already plan on a certain percentage of their borrowers to go into default but not one-quarter of them.

The fact is that consistent payment of mortgages and the system of investments tied to that are one of the core pillars of our economic ecosystem.   If overnight 12.5 million households stop paying their mortgage it has the ability to collapse the entire system (see 2008).

Allowing the mortgage industry to destabilize could trigger another huge cycle of foreclosures.

Though major banks might be able to withstand the hit and weather the storm most people (even most real estate agents) do not understand that all mortgages are NOT held by big banks.  Mortgage servicers hold many of these mortgages and they depend on the payment of these loans to stay afloat.

“If these companies (mortgages servicers) go bankrupt, no one is going to want that servicing. The big banks don’t want it for the capital requirements and other reputation risk comes with it. Financially, somebody has got to pick that up,” said Mike Calhoun, president of the Center for Responsible Lending, a non-profit that advocates for boosting consumer financial protections.

If there is no one there to service these loans, collect mortgage payments and get the money to investors of the mortgages, then the ENTIRE INDUSTRY COULD FAIL.   (Not a joke.   This is very real and very scary.) Investors would be left holding the bag on worthless mortgage bonds.

There are $9 trillion securitized in mortgage back securities, making the mortgage backed securities market the largest sector of the fixed-income markets, even larger than U.S. Treasury debt.

Worst of all,  lenders would then not have the funds that they typically lend to new borrowers, therefore, at worst, crashing the whole housing system, and at best, a liquidity crunch.

 

PROBLEM 2: It seems so stupid to even consider, but some people who ask for the mortgage payment relief are not going to pay it back potentially causing a second wave of this issue.

The CARES Act allows for some borrowers to seek forbearance for as much as 180 days, with no impact to their credit. The problem some borrowers will be confused on what happens with those payments after the period is over.  The easy qualification process could cause normal, not necessarily troubled borrowers, to take advantage of a perceived “break” in paying their mortgage only to be shocked when that 3-6 months of payments bill suddenly becomes due, therefore putting their home at risk of foreclosure at a time when equity in homes is at its largest.

Congress and the Federal Reserve now realize this, and hopefully, help is on the way. But until then, more people in the industry NEED to be talking about this and discussing it with their clients.   This storm is not coming IT IS HERE.