New Democrat Coalition Members Send Letter to Federal Agencies to Stabilize the Mortgage Market During COVID-19
NDC Housing Task Force Co-Chair Denny Heck Leads Members on Letter to Federal Agencies
Today, New Democrat Coalition (NDC) Members, led by NDC Housing Task Force Co-Chair Denny Heck (WA-10), sent a letter to the federal financial and housing agencies asking them to take steps to stabilize and simplify the mortgage market during the COVID-19 crisis.
“One of the enduring lessons of the Great Recession is how destructive the dysfunction in the home mortgage market can be to the broader economy,” said NDC Housing Task Force Co-Chair Denny Heck. “We cannot afford to repeat the mistakes we made in 2008. Right now, Americans are facing job loss, struggling with child care, and dealing with other unprecedented financial burdens stemming from COVID-19 – and many are finding themselves unable to make their mortgage payment during this crisis. Not only do we have to get meaningful help to them as soon as we possibly can, but we must stabilize the mortgage market to ensure those hit hardest can weather this crisis.”
The 2008 recession was initiated by poor underwriting and lending practices, but it was exacerbated by widespread problems, including bankruptcies of the companies responsible for collecting payments each month from borrowers and passing those payments along to the loan’s owner. These companies, called third-party mortgage servicers, were overwhelmed by the housing crisis. Payments, modification documents, and even the mortgages themselves were often lost, and the result was thousands or even millions of unnecessary foreclosures, even after Congress put in place homeowner assistance programs.
Congress proactively included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act a provision allowing homeowners with a federally backed mortgage who are suffering economically to delay mortgage payments for up to twelve months -- but problems in the mortgage servicing market could undermine Congress’s intent. Whenever a borrower does not make payments, the mortgage servicer must advance the payment out of its own funds. If millions of Americans use the forbearance period allowed in the CARES Act, mortgage servicers will run out of money quickly, resulting in a cascade of problems repeated from the last recession.
To avoid this, the letter to the federal financial and housing agencies asks them to take three steps to stabilize and simplify the mortgage market during the COVID-19 pandemic:
1) Create a liquidity facility that mortgage servicers can borrow from in order to fund advanced payments.
2) Standardize modification options at the end of the CARES Act forbearance period.
3) Extend the forbearance and modification options to all homeowners.
Full text of the letter can be accessed here or below.
The letter was signed by all members of the NDC's Housing Task Force, as well as every NDC member on the House Financial Services Committee.
Signers on the letter include: Rep. Denny Heck (WA-10), Rep. Jim Himes (CT-04), Rep. Ben McAdams (UT-04), Rep. Juan Vargas (CA-51), Rep. Bill Foster (IL-14), Rep. Josh Gottheimer (NJ-05), Rep. Ed Perlmutter (CO-07), Rep. Jennifer Wexton (VA-10), Rep. Cindy Axne (IA-03), Rep. David Scott (GA-13), Rep. Gregory Meeks (NY-06), Rep. Al Lawson (FL-05), Rep. Derek Kilmer (WA-06), Rep. Scott Peters (CA-52), Rep. Adam Smith (WA-09), Rep. Kim Schrier (WA-08), Rep. Suzan DelBene (WA-01), Rep. Rick Larsen (WA-02), Rep. Vicente Gonzalez (TX-15), Rep. Madeleine Dean (PA-04), Rep. Stephanie Murphy (FL-07), Rep. Norma Torres (CA-35), Rep. Sean Casten (IL-06), and Rep. Charlie Crist (FL-13).
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Dear Secretary Mnuchin, Secretary Carson, Chair Powell, Director Calabria, Secretary Perdue, and Secretary Wilkie:
Thank you for your work to stabilize the U.S. economy and maintain Americans’ access to housing during this disease outbreak and necessary public health response. We support the steps you have already taken to allow mortgage borrowers to avoid delinquency, and we write today to ask for additional steps to ensure that mortgage markets are able to function smoothly and that homeowners are able to continue to afford their mortgages once the current forbearance period is over.
In order to support homeowners and to prevent the mortgage market from becoming a vector for damage to the financial system as it was in 2008, we encourage your agencies to adopt three connected policies as soon as possible:
- Clear guidance on how to handle the forborne payments at the conclusion of the forbearance period, with an emphasis on ensuring mortgage payments remain affordable;
- Creation of a liquidity facility that will allow mortgage servicers to fund the payments they must advance to loan owners during the forbearance period; and
- A requirement that any servicer that makes use of the liquidity facility offers the same forbearance options and post-forbearance modification procedures to all mortgage borrowers, whether or not their mortgages are federally insured.
We strongly support the Federal Housing Finance Agency’s (FHFA) quick action to provide up to 12 months of forbearance for and suspend foreclosures for homeowners during this economic crisis, and this policy was extended to all federally backed mortgages in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Given the magnitude of this crisis and the 20 million applications already completed for Unemployment Insurance (UI), we expect millions of families to qualify for and take advantage of the forbearance relief. We appreciate the FHFA’s announcement that mortgage servicers are only required to advance four months of missed payments, but more must be done to ensure we have a unified policy on advancing payments. In order to make existing and expanded forbearance programs work, we believe several steps must be taken now.
Liquidity for Mortgage Servicers
As you know, third-party mortgage servicers are contractually obligated to advance the payments to the loan owner when borrowers do not pay, either due to delinquency or forbearance. As more borrowers take advantage of forbearance, mortgage servicers will increasingly have to step in, and the required advances seem likely to exhaust the cash reserves of many or all of the mortgage servicers. We saw in 2008 how failures of mortgage servicers created significant stress on the financial system. Financial stress among mortgage servicers also caused unnecessary foreclosures. There is no reason to risk either of these happening again, especially given the federal government’s good early steps to help homeowners. We urge the federal government to create a liquidity facility that servicers can draw upon to access the cash they need to make their required advances. This facility should have conditions that ensure the liquidity facility is for the direct benefit of homeowners and the financial stability of the mortgage servicing industry.
Modifying Mortgages After Forbearance
One fundamental question in developing a liquidity facility is the term of the loans, and that in turn depends on when mortgage servicers will be repaid for the amounts they’ve advanced. The various agencies have taken a variety of approaches to this with repayment varying from partial repayment of the advance within a couple months to repayment once a modification is completed after forbearance, likely 15 months or more. As part of developing the liquidity facility, the federal agencies should provide certainty and consistency on when they will repay servicer advances.
In most cases, the repayment of servicer advances will be closely tied to completion of a mortgage modification following the forbearance period. This process would also benefit from greater consistency. Most of the agencies have laid out several different modification paths for their servicers and the options vary from agency to agency. We support the goal of tailoring each modification to the borrower’s specific situation, but we believe simplicity is a greater virtue when we likely will see millions of Americans exiting forbearance in a narrow window next Spring. This will improve communication to borrowers and reduce the chances that the servicers are overwhelmed and unable to complete modifications borrowers are entitled to, which occurred far too often from 2008 to 2012. In recognition of this, federal agencies should deploy a few, uniform modification options for borrowers at the end of their CARES Act forbearance period. In recognition of this, federal agencies should deploy few, uniform modification options for borrowers at the end of their CARES Act forbearance. Modification options should include the FHA's National Emergency Partial Claim, which rolls the forborne payments into an interest-free second mortgage, and the selection of the final modification should be driven by affordability to the borrower so as to minimize the chance of redefaults.
Options for Non-Agency Mortgages
For those Americans whose mortgage is backstopped by the federal government, the safety net of forbearance and modification described above should be robust enough to allow them to maintain their homes for the duration of the crisis. However, $4 trillion in single-family mortgages fall outside of the CARES Act scope. In the interests of simplicity (homeowners are often not aware who actually owns their mortgage, so they won’t necessarily know which relief they’re entitled to) and equity (the economic damage from the virus affects everyone, regardless of the type of mortgage), the uniform forbearance and modification options described above should be offered to all homeowners, and the liquidity facility provides the tool to extend this relief. Third-party servicers who make use of the liquidity facility should be required, as a condition of accessing the liquidity, to offer the same forbearance and modification options to all borrowers. As part of this, all servicers should be required to demonstrate compliance with fair lending laws in conducting these modifications.
Plans for the Future
Several of us have longstanding concerns with the structure of the mortgage servicing market. We support further examination and regulation of capital and liquidity requirements in mortgage servicing, and we will work closely with you on any legislative proposals you have on this subject. But for now, the focus must be on urgent action to ensure that we do not face massive disruptions of the mortgage market and that homeowners get the assistance to which they are entitled.
We appreciate your continued efforts to help sustain the American economy and our housing finance system during these challenging times, and we look forward to working together to protect homeowners and the mortgage market during the COVID-19 pandemic. Thank you for your consideration.
Sincerely,
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