For decades, most American homeowners could believe their house financing was safe. The mortgage company whose representative met them in their office in the local mall existed in a complex but predictable harmony with investors, other banks and companies called servicers, which administer mortgage payments.
Sometimes mortgage rates went down and homeowners could exchange their mortgage for a cheaper one, giving them a few extra dollars to spend with the kids on the weekend.
The system is huge. Total assets of federally supported housing finance entities Fannie Mae ($3.5tn), Freddie Mac ($2.2tn) and Ginnie Mae ($2tn) are close to the total government debt of France, Germany and Italy. If the servicers are not working properly, the paperwork on that is not being sent to the right place every month, the cash is not being routed to the holders of securitised bonds and the system would be in chaos.
Americans, as homeowners, workers and voters, were told last month that everything could go back to normal, that they could use their Covid-19 bailout money to live while locked down.
American politicians know the voter-job-house deal is the one they must continue to deliver, whatever viruses or financial shocks come along. Thanks to bureaucratic and market momentum, as much as Congressional action, US housing sales and finance are stumbling but getting through April. It looks as though significant parts of the system, worth tens or hundreds of billions of dollars, will crash in May.
There was supposed to be a deal in place, admittedly not one that was well thought through, to keep housing finance ticking over. Unfortunately there is one man — an officious regulator named Mark Calabria, the head of the Federal Housing Finance Agency — who has decided that the simple fix to the financial problem caused by the coronavirus pause should not be simple.
Despite the industry’s pleas, Calabria will not arrange for Fannie and Freddie or the Fed to make secured bridge loans to the servicers, which keep track of the documents, mail the accounts to the borrowers and the checks to the bondholders, who own the mortgages.
For its part, Ginnie Mae, directly owned by the government, has agreed to lend crisis money to servicers, which make Calabria’s inaction even harder to understand.
According to Calabria, the payments shortfall for the servicers caused by congressionally mandated loan forbearance is all “spin”. The mortgage bankers who generate most US mortgages are extremely angry with him. For the moment, Calabria has the support of Treasury secretary Steven Mnuchin. Apparently, Calabria has decided that there has to be a “stress test” for the servicers this May, and perhaps for a few months after that.
This works only if it is possible to take live mortgages out of distressed servicers and transfer their work and liabilities to some new bank or servicers, which can perform the same function, ideally without their borrowers triggering high cost “special servicing” that goes to the financially stretched.
Few if any people in the mortgage industry believe that is possible come May or June. They believe there could be a downward spiral of mortgage failures, screwed up documentation, delayed payments and another procyclical acceleration into the hole of depression.
Before the pause driven by the coronavirus and the relief efforts, Mr Calabria and Mr Mnuchin had been vigorously pushing a plan to take Fannie Mae and Freddie Mac out of the government’s protection. They were putting in place something called “administrative recap and release” to the capital markets. Incidentally, friends of the Trump administration who controlled a bit over $33bn in junior preferred stocks would make some speculative profits.
A long list of Republican and Democratic senators, who the administration needs for the next stimulus bill, just circulated a letter that is hostile to Calabria’s plan.
Calabria makes an unlikely villain, but he has become one in the world of housing finance. At this rate, he will do well to collect a fat severance payment at the end of May. For his safety, Congress may have to throw in anonymity through the witness protection programme, and maybe a job under his new name, perhaps teaching slide deck composition at a for-profit online college.