Big banks aren’t the biggest players in residential mortgage lending anymore. When the financial crisis hit in 2008, they were, and got whacked the hardest. But not now; rather the big dogs are mortgage companies that originate, underwrite, fund and then sell the loans to Fannie Mae and Freddie Mac, where the paper is packaged into mortgage backed securities (MBS), and a federal government guarantee attached to the investments. After marketing the mortgages, they then service the loans, remitting the payments to the securities administrator.
The rise of these enterprises has been dramatic. In 2010, they originated around 10% of residential mortgages funded; in 2019, that figure was up to a whopping 50%. Following the 2008 Great Meltdown, these non-bank lenders serviced around 5% of outstanding home loans. The percentage has sky-rocketed to 49% in 2019.
These operations are very big, but they’re not too big to fail, and they know it. Many will have a tough time surviving the current depression, especially if it lasts for long. That’s because they service loans that don’t belong to them anymore.
It’s a big job. The mortgage company gets paid for it by collecting an override of around one quarter of one percent gross, which shrinks to between .10 and .12 after expenses. That’s a very thin margin when things are going well. It’s an encounter with an iceberg when they’re not. One problem is that servicers have to keep sending payments to the MBS administrator when a borrower stops paying the mortgage. In April servicers, banks and mortgage companies alike, coughed up close to $4.8 billion in past due payments. After the property is foreclosed, they get made whole, but that takes a long, long time.
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No business can sustain that kind of drain for long. The CARES Act mandated that federally related loans, i.e. those backed by Fannie and Freddie, FHA insured and VA guaranteed, would qualify for forbearance for up to a year, meaning that a borrower could make no payments during that period; of course those payments would then have to be covered in some fashion, possibly by a loan modification. For the entities servicing the loans, fronting a year’s worth of payments for millions of mortgages is an economic impossibility.
The devil in this detail is that the mortgage finance system isn’t structured to facilitate that considerate gesture on the part of Congress. When the Dodd-Frank Act was passed after the 2008 housing crash, great care was exerted to overhaul the consumer — i.e. customer — side of the home financing industry with a variety of rules and regs, culminating in the establishment of the Consumer Financial Protection Bureau (CFPB). But the structure responsible for making the vehicle go barely got a glance. Lawmakers gussied up the chrome, but didn’t touch the engine.
Fannie, Freddie, their regulator, the Federal Housing Finance Agency, and servicers, banks and non-banks alike are scratching their heads, looking for ways to accommodate CARES, and simultaneously hew to the requirements of the trillions in Mortgage Backed Securities issued by Fannie Mae, Freddie Mac, and Ginnie Mae, which guarantees pools of FHA and VA loans, all of which are backed by a government (taxpayer) guarantee.
The mortgage company position is perilous because they’re not banks. If they don’t have reserves to handle a catastrophic situation such as the pandemic, and most of them don’t, they have to borrow money at market rates.
Banks, on the other hand, don’t. They borrow from depositors at practically zero interest. The majority of deposits in FDIC-insured institutions are in the form of checking accounts, which earn no interest. In fact, most checking accounts are charged a maintenance fee, which mitigates the high cost of account administration; the major reason a well-run bank can be one of the most profitable enterprises on the planet.
As anticipated, a lot of people spent a lot of lock-down leave chatting with mortgage lending robot ladies. Many had customer-friendly forbearance plans dangled before them, such as a modification that would tack the suspended payments on the end of the loan, only to be notified that they’d been approved for a three or four months’ forbearance, with a lump sum due at the end. Many have opted to forego other obligations, and just continue making their mortgage payments.
Which shows that the lenders know what they’re doing. The first thing you learn, if you’re collecting a debt, whether you’re a thousand dollar an hour bankruptcy lawyer representing a Fortune 500 company, or a runner collecting a small time gambling debt: get as close to the front of the line as you can. You don’t care if the other guy gets paid, you just want yours.
LUC (Law of Unintended Consequences) Department update: We’ve noted how disappointed those who buried cash for an unforeseen emergency must have been when they learned that toilet paper in the ground might have been the better option. Now, the dollar diggers have been whacked again: Many retailers won’t accept cash in view of the virus risk.
As Gilda Radner used to say: “It just goes to show you, it’s always something.”
Pat Dalrymple is a western Colorado native and has spent more than 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His e-mail is pdalrymple59@gmail.com.
