Associations Ask Administration Officials to Address the National Emergency posed by COVID-19

Andrew Olmem
Special Assistant to the President for Financial Policy
National Economic Council, White House
1650 Pennsylvania Avenue
Washington, DC 20502

Steven Mnuchin
Secretary
U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220

Jerome Powell
Chair
U.S. Federal Reserve
Constitution Ave NW &, 20th St NW
Washington, DC 20551

Kathleen Kraninger
Director
Consumer Financial Protection Bureau
1700 G Street NW
Washington, DC 20552

Mark Calabria
Director
Federal Housing Finance Agency
400 t Street SW
Washington, DC 20024

Dr. Ben Carson
Secretary
U.S. Department of Housing & Urban Development
451 7 St SW
Washington, DC 20410

Ladies and Gentlemen:

We want to convey our support and appreciation to you and other Administration officials who are working diligently to develop a comprehensive set of economic programs and financial facilities to address the national emergency posed by COVID-19. As our various organizations1 have reported to you and U.S. Department of Treasury, and U.S. Department of Housing and Urban Development officials in previous communications, we have been working to develop a set of recommendations pertaining to homeowners facing challenges paying their mortgage due to this national health emergency.

With this letter, we want to share our thoughts and recommendations arising from this effort. We will divide the discussion into two separate, but important components. These components are distinct – one is universal, intended to apply to all affected consumers in the same way and speed delivery of relief to consumers, and one is limited, applicable to non-depository mortgage servicers in need of liquidity support.

Universal Consumer Support 

The mortgage market issues for consumers in the wake of the pandemic has two elements – challenges posed to existing homeowners and challenges posed to home buyers and those in the process of refinancing their mortgages or completing home purchases.

Existing Homeowners

It is our objective to quickly and efficiently respond to the growing number of affected households with a uniform program that is simple and streamlined. The mortgage industry is committed to ensuring that households in need receive help immediately through payment forbearance that could extend from ninety days to twelve months. This assistance would be followed by an appropriate loan modification, with programs that allow consumers to simply resume their previous mortgage payments, without additional costs or penalties, as the first and best option for most, but complemented by programs that can provide more substantial payment relief through changes to the rate and term of the mortgages, as necessary, also without additional costs or penalties.

The operational elements of this borrower assistance have received intense input from across all the participating associations. This is critical because it will be essential that borrowers in need of assistance receive it in a consistent manner and on similar terms. Because this is a program that many firms must implement and implement the same way, we have focused not just on overall goals but also on operational details.

Together, we have constructed the attached term sheet (attachment 1), which describes the areas where the industry is seeking:

• additional universal program guidance from the government-sponsored enterprises and government agencies,
  
• waiver of some policies and practices that that may add unnecessary delay and friction, and
  
• streamlined approaches to customer notification or documentation to make it as efficient as possible to receive relief.
  

We are working with each appropriate government agency individually to pursue the requests included in this term sheet. But we emphasize the importance of producing a single model forbearance program that produces the same outcomes for consumers across lending programs.

We also are working with a broad group of mortgage servicers to develop uniform messaging and materials that could be used industry-wide, to ensure that customers know what to do and how to access the services available, should they find themselves unable to stay current on their monthly payments. We also want to be clear that, considering reductions in the number of staff able to field calls as a result of the pandemic, borrowers should only reach out to their servicer if they are in immediate need of assistance. And finally, it is critical that we continue to message that all those who can pay their mortgage, should pay their mortgage.
We cannot emphasize enough the need for a close partnership between industry and the federal government on the messaging surrounding this borrower assistance. For example, a “.gov” website reinforcing the standards and terms of the borrower assistance program would aid consistency in messaging, reinforcing that this assistance is available to those in actual economic distress due to the pandemic and that others should continue to make their mortgage payments, a message that will target critical resources to those in need and bolster consumer confidence in the approach.

New Mortgage Applicants

A month ago, the mortgage industry’s immediate concern was managing the surge in new mortgage applications, especially for refinancing. The second element of the industry response to the pandemic is targeted at the operational difficulties the industry now faces as a result of the broad-based shut-down of both private and public services, including county recorders offices and other critical government functions. Attachment 2 lists key process steps in mortgage origination and closing that have been broadly disrupted. For example, it now is difficult if not impossible for loan originators to communicate with a prospective borrowers’ employer to verify employment status, to complete necessary paperwork with “wet signatures” validated by notaries, and to obtain property appraisals when many professionals are subject to mandatory isolation and telework policies.

Originating loans is an important component of consumer relief that will allow consumers to achieve or maintain homeownership at low interest rates long term. Our associations are currently engaged with various federal departments and agencies, identifying specific process steps disrupted by current conditions and developing appropriate alternatives. In some cases, these will require regulatory waivers or relief, in other cases an openness to alternative approaches.

We intend to continue our engagement with appropriate regulators. Our request of our regulators is to work with us to construct appropriate relief to ensure that mortgage production does not grind to a halt and that lenders are not penalized for demonstrating prudent judgment adapting to these unusual and temporary conditions. Rules are there to protect consumers but cannot be allowed to stifle or halt a consumers’ ability to close mortgage loan applications because of these extraordinary circumstances reflecting a national health emergency.

Liquidity for Non-Bank Mortgage Servicers

This section addresses the need of non-depository mortgage servicers, as our bank members are expressing increasing confidence that they will have sufficient capital reserves and liquidity resources necessary to handle the current stressed environment.
Separate from the consumer-focused elements described in the previous section of this letter, our associations recognize that the stability of our housing finance system depends upon mortgage servicers providing the extraordinary financial support to consumers demanded by these conditions. In this case, the need is not universal, yet the systemic risks of failing to address the need where it exists could bring great harm to borrowers and to housing markets and housing finance.

As background, when a borrower fails to make their monthly mortgage payment, the mortgage servicer must still pay the principal and interest to investors, as well as pay the real estate taxes, homeowners’ insurance, and mortgage insurance on their behalf. In the regular course of business, all servicers maintain liquid reserves to cover these advances. Attached to this letter is a short summary of how servicing advances work and sizing the dollar magnitude we could be facing (Attachment 3).

Today, with millions of Americans experiencing a material reduction or elimination of income as the country combats COVID-19, many households will be unable to make their mortgage payments. This will trigger an unprecedented need for borrower forbearance, which will strain and possibly overwhelm some servicers’ liquidity reserves, all of which were calculated and set aside for more ordinary times.

The financial stress to servicers will vary but will be most pronounced for non-bank mortgage servicers that are engaged solely in the mortgage business. These servicers have fewer liquidity sources than depositories and they manage their mortgage operations with cash flow generated from the mortgage business, including origination revenue and servicing proceeds, and rely on both equity from private firms and financing from commercial banks. In contrast, insured depositoryinstitutions have sources of cash flow from their non-mortgage business lines, substantial reserves of regulatorily-required capital, as well as access to backstop liquidity sources.

Because independent, nondepository mortgage servicers do not have access to the liquidity resources available to banks, they are more vulnerable to the unprecedented level of delinquencies and payment forbearance that will be required. Further, these companies are the dominant providers of mortgages through the FHA and VA programs, which poses an additional challenge. FHA and VA loans are securitized through Ginnie Mae. Unlike the GSEs, Ginnie Mae does not directly reimburse servicers for the advances made to investors nor does Ginnie Mae step into make those payments as the delinquencies persist over a protracted period. Delinquent loans can remain in Ginnie Mae securities, and thus require servicer advances, or servicers may buy them out, which requires even more cash resources, both of which demand a tremendous amount of liquidity. The existing financing vehicles, generally commercial banks and warehouse lenders, employ risk controls and rules concerning the level of delinquencies and overall liquidity profile of a servicer that are intended to contain risk, but that will likely cause additional financial strain during this period of unprecedented economic stress. Further, the FHA and VA market segment represents a larger proportion of low- and moderate-income borrowers, who will likely sustain a more significant economic impact of this emergency.

In sum, the financial stress to the system is highly concentrated - concentrated with independent mortgage companies that do not have access to the existing Federal liquidity facilities, concentrated with the predominant Ginnie Mae issuers who operate without the type of financial backstop offered by the GSEs, and concentrated in the segment of the population that is most likely to be affected economically by this national emergency.

Therefore, for the welfare of those borrowers and for the good of the housing finance system, the market today needs a backstop liquidity source for these independent mortgage servicers. There are at least two federal financing vehicles available today that could be deployed. One is Ginnie Mae’s Pass-Through Assistance authority, which enables the agency to make principal and interest advances to bondholders on behalf of a servicer for some period of time. The other, which has already been deployed in this crisis for other emergency funding needs, is the Federal Reserve’s 13(3) authority. Beyond these existing authorities, other options are available, including congressional authorization for these programs or for Treasury to directly finance or guarantee servicer advances as requested by servicers. Beyond these existing policy options, any additional legislative or regulatory measures must be designed to protect the safety and soundness of the financial system, with government agencies acting in concert to respond to this national emergency.

The critical point is the necessity of a temporary government backstop liquidity source(s) to fund an unprecedented need for servicer advances. We do not have a specific operational plan for providing this liquidity, in part because the various programs that could be used have very different parameters and requirements. We are prepared to assist in developing detailed plans for how to implement such temporary liquidity support.

It bears repeating that not every servicer may want or need to use this type of temporary liquidity facility – and therefore, the access to such facilities should be voluntary and optional. Yet the entire housing finance system, including borrowers, would benefit from a material reduction in systemic risk that we face, with a portion of the mortgage servicing market constrained by insufficient liquidity resources during this national emergency. That is why all our associations are in favor of this measure.

The information we are providing here we are also providing to other federal departments, agencies, the Congress, and the GSEs. We are ready to discuss any of these items with you and your colleagues. We implore the Administration to ensure engagement and harmonization among government agencies to create an environment that will allow lenders and servicers to meet the needs of consumers in this unprecedented pandemic. We stand at the ready to help in any way that you deem appropriate.

Yours truly,

American Bankers Association
Consumer Data Industry Association
Housing Policy Council
Mortgage Bankers Association
Structured Finance Association
The National Mortgage Servicing Association
US Mortgage Insurers