When the Waterbed Bursts

Diego ZuluagaWhile it appears the combination of ample liquidity injections by the Fed and soft loans guaranteed by the Small Business Administration has managed to ease concerns of a looming and massive cash crunch across the economy, there is at least one group of financial firms that has yet to see any respite:mortgage servicers. These are the companies that collect mortgage payments and pass them on to the investors who hold mortgage ‐​backed securities (MBS). For that service, they collect a fee.But now that officials have declared a moratorium on mortgage payments for all distressed borrowers, mortgage servicers are in trouble. By contract with the main guarantors of MBS —Fannie Mae, Freddie Mac, and Ginnie Mae (all government‐​run)— they are supposed to continue paying investors even if borrowers become delinquent. Fannie& Co. ultimately make up for those payments, but there is a lag between nonpayment and reimbursement, which servicers must manage.In ordinary circumstances, mortgage servicers usually have a capital cushion sufficient to handle the gap between borrower delinquency and reimbursement by the guarantor. But the government ‐​mandated nature of the COVID-19 lockdown and the broad coverage of the moratorium mean that millions of borrowers are expected to go delinquent at once, for a period of as ‐​yet‐​unknown length. Owing to this large and unforeseen event, mortgage servicers havewarnedthat they...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs