Mortgage crisis prompts US to weigh harder line with borrowers

Washington

WITH a wave of US mortgage borrowers expected to seek reprieves from monthly payments, regulators are bracing for the reality that they may have to take a harder line in specifying who exactly qualifies for relief.

The likely surge in coronavirus-fuelled forbearance requests has been exacerbated by the US$2.2 trillion stimulus measure that Congress passed last week.

The legislation stipulated that homeowners hurt by the pandemic's devastating impact on the economy could delay payments for months.

But lawmakers put few burdens on borrowers, forbidding mortgage servicers from demanding documented proof of hardship. Instead, consumers would just have to attest that they are struggling.

In anticipation that there could be confusion, fights and even widespread abuses as borrowers withhold payments, agencies are seeking to clarify that the break is only for those who really need it.

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Officials at the Federal Housing Finance Agency (FHFA) and the Department of Housing and Urban Development (HUD) are among those discussing whether to issue guidance on who is eligible.

The regulators could take other steps to make clear that pain must be legitimate, such as requiring evidence that borrowers have actually lost their jobs.

Government watchdogs want to see how many consumers seek forbearance before taking more aggressive steps to clarify who can apply.

FHFA spokesperson Raphael Williams said the agency interprets the stimulus legislation as requiring that consumers have to have lost jobs or income to qualify for forbearance.

Mortgage relief is "for those who do not have the means to make payments due to economic hardship caused by Covid-19", said HUD director Ben Carson. "If people are in a situation where they can pay their mortgage or rent on time, they should do so."

About 300,000 borrowers whose mortgages are backed by Fannie Mae and Freddie Mac have requested forbearance as at April 1, according to the FHFA.

It is expected to become clearer in the coming weeks just how bad the problem will get, as bills become past due.

Mortgage lenders are already preparing for the biggest wave of delinquencies in history after a record 10 million people applied for unemployment benefits over the past two weeks.

It is also not clear how long the crisis will last. As many as 30 per cent of Americans with home loans - about 15 million households -- could stop paying if the US economy remains closed till the summer or beyond, according to an estimate by Mark Zandi, chief economist for Moody's Analytics.

Non-banks that service mortgages would likely be hit hard because they are still obligated to distribute monthly payments to investors in bonds tied to home loans even if borrowers stop paying. As a result, servicers are bracing for a liquidity shortfall.

FHFA director Mark Calabria said in a Bloomberg Television interview last week that Fannie and Freddie, the mortgage giants that backstop about half of the nation's US$10 trillion housing market, might have to take delinquent loans on their books if missed payments pile up.

Mr Calabria's agency regulates Fannie and Freddie, which have been under government control since the 2008 financial crisis.

Under the stimulus legislation, borrowers with loans insured by government agencies such as the Federal Housing Administration and the Department of Veterans Affairs would be eligible for forbearance.

Consumers whose mortgages are backed by Fannie and Freddie would also be eligible to skip payments.

Who's eligible?

Borrowers would be eligible for 60 days of forbearance if they can demonstrate virus-related financial stress. The relief can be extended for 30 days up to four times.

While most of the new programs are aimed at helping home owners, the government is also trying to help renters too.

The FHFA has granted mortgage forbearance to US landlords in exchange for suspending evictions if renters cannot make payments.

Commercial borrowers with federally backed loans could potentially skip payments for at least 30 days with a possible extension of up to 60 additional days.

Unlike individual consumers, businesses would have to document financial hardship and they would be barred from evicting tenants as long as they are missing mortgage payments.

Officials are also considering taking additional steps to help renters, a group that they have warned could cause further turmoil in the housing market as the crisis continues.

As the White House weighs a fourth round of stimulus measures, it is considering recommendations from housing agencies that include providing help through existing state grant and voucher programmes to help renters stay in their residences. BLOOMBERG