- Mortgage servicers face a potentially catastrophic loss in the wake of coronavirus, leading to a housing market crash.
- Several government agencies local and federal are providing loan forbearance that could delay housing payments for months due to COVID-19.
- As a result soaring defaults could crash the housing bubble, while mortgage securities turn toxic as the coronavirus crisis wears on.
When the housing market crashes, it’ll be mortgage servicers and lenders that lose their shirts. Then the financial institutions that invest in bundled mortgage securities.
That’s because authorities are putting protections in place for home owners and renters in the wake of coronavirus. That’s good for them, and bad for mortgage servicers.
These relief programs will be aptly described for those facing financial hardship due to coronavirus. But that will pass the burden on to housing lenders.
The 2007 housing market crashed on a wave of defaults by subprime borrowers. With the coronavirus response cutting off a staggering number of Americans from their source of income, defaults are about to soar. And the government is likely incentivizing a bigger wave of defaults with moratoriums on foreclosures.
That’s the right thing to do for people who need it. But it will also create the same conditions at play in the last housing market crash.
Housing Loan Forbearance Programs
President Donald Trump has placed a 60-day moratorium on evictions and foreclosures. It applies to homeowners who have mortgages insured by the Federal Housing Administration (FHA). The FHA insures home loans made by FHA-approved lenders.
President Trump’s moratorium:
Meanwhile Fannie Mae and Freddie Mac (which played a major role in the 2007 housing market crash), along with the Federal Home Loan banks, are allowing payment forbearance to borrowers for 12 months.
This foreclosure and eviction suspension allows homeowners with an Enterprise-backed mortgage to stay in their homes during this national emergency. As a reminder, borrowers affected by the coronavirus who are having difficulty paying their mortgage should reach out to their mortgage servicers as soon as possible
Officials on a state and local level are also easing the burden on homeowners and renters. New Jersey’s governor has enacted a moratorium on evictions and foreclosures until further notice.
Oregon’s governor placed a 90-day moratorium on evictions for non-payment of rent. That’ll leave landlords with mortgages emptied-handed to pay. New York’s governor also placed a 90-day moratorium on evictions.
Governor Andrew Cuomo addresses mortgage-payment concerns for New York residents. The state has become a new epicenter for coronavirus infections.
Coronavirus and The Next Housing Market Crash
Mortgage servicers are the businesses that essentially oversee mortgages. They collect mortgage payments and pass them on to the investor who owns the mortgage. They have an obligation to make the payments whether the homeowner pays or not.
The Mortgage Bankers Association estimates that if about a quarter of all borrowers request and are granted loan forbearance for six months or longer, demands on servicers could exceed $75 billion and could climb well above $100 billion.
Bob Broeksmit, CEO of the Mortgage Bankers Association, is concerned that,
the servicers won’t be able to meet their obligations to the investors and the whole process will break down.
If the housing market crashes at this link in the chain, investors in mortgage securities will also be left high and dry.
Further upstream in the housing market, buyers and sellers are exiting because of coronavirus. That will lead to a loss of new business as well as defaults on old business.
In a sign of the times, Zillow paused all home buying in the 24 markets it operates in Monday. Realtors all over the country are expecting a slowdown in the housing market.
The housing market crash could take down the lending industry first this time. But if the economy goes into a depression that outlasts the relief and moratoriums, homeowners will hurt too.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com.