Nearly 10 million Americans filed for unemployment benefits over the past two weeks. If homeownership among that group is about 65% (the U.S. rate at the end of December), then 6.5 million mortgage payments could be in jeopardy beginning this month and lasting for months.
In an interview with the Financial Times, Federal Housing Finance Agency director Mark Calabria said that if the coronavirus lockdown extends for more than two or three months, “there is going to be real stress in the mortgage market.”
The problem, like virtually everywhere else in the global economy, is lack of liquidity. If 25% of American homeowners have to ask for forbearance on their mortgage payments, “that would require Congress to step in,” Calabria said.
If Congress does step in, it would be the second bailout of government-sponsored entities (GSEs) Fannie Mae (FNMA) and Freddie Mac (FMCC), that combined provide guarantees for nearly half of U.S. mortgages. Fannie and Freddie, Calabria told the Financial Times, are levered 240 to 1 and need “all the capital we can muster for ourselves.”
Even if no money is flowing in from homeowners, holders of the mortgage-backed securities must still be paid by the banks and other mortgage lenders that will not receive repayment from Fannie or Freddie for six months. With only enough liquidity to cover that kind of outflow for three months, the lenders won’t be getting enough help from the two GSEs.
Fannie and Freddie have been in conservatorship since the financial crisis of 2008. The two agencies received bailout funding totaling $190 billion from the federal government and have repaid more than $300 billion to the U.S. Treasury since then. But can the Treasury supply the liquidity the mortgage market will require? Or will the Federal Reserve have to do it?
Plans for an IPO late next year that would have seen the federal government sell its stake in the agencies may have been derailed by the coronavirus pandemic, though, and almost certainly will have to be postponed. Without funding from Fannie and Freddie, lenders also will face a liquidity crisis. Can the Fed backstop this as well?
A holiday for mortgage holders provides some time for federal agencies, banks and borrowers to assess the impact of the economic slowdown and plan for what to do when it ends. One thing that must happen, however, is to figure out a way to prevent a massive number of foreclosures when economic life begins returning to normal. Yet another job for the Fed.
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