On April 21, the Federal Housing Finance Agency (“FHFA”) announced limits on servicer obligations to advance scheduled monthly principal and interest payments for single-family mortgage loans backed by Fannie Mae and Freddie Mac (the “Enterprises”). Once a servicer has advanced four months of missed payments on a loan, it will have no further obligation to advance scheduled payments. FHFA also is instructing the Enterprises to maintain loans in coronavirus (“COVID-19”) payment forbearance plans in Mortgage–Backed Security (“MBS”) pools for at least the duration of the forbearance plan. This announcement comes in response to mounting liquidity concerns within the mortgage servicing industry over the last several weeks, although falling short of the industry’s continued call for a liquidity facility.
Normally, when a mortgage loan is in a MBS, Fannie Mae servicers with a scheduled payment remittance are responsible for advancing the principal and interest payments regardless of borrower payments. Freddie Mac servicers, who are generally responsible for advancing scheduled interest, are only obligated to advance four months of missed borrower interest payments. FHFA’s new policy brings Fannie Mae servicer obligations into alignment with those of Freddie Mac, and the changes apply to all Enterprise servicers, regardless of type or size.
Further, prior to the pandemic, mortgage loans that were delinquent for more than four months were purchased out of MBS pools by the Enterprises. By keeping loans subject to COVID-19 forbearance within the MBS pools, FHFA’s latest move essentially treats these loans like a natural disaster. The FHFA said that this change “reduces the potential liquidity demands on the Enterprises resulting from loans in COVID-19 forbearance and delinquent loans.”
“The four-month servicer advance obligation limit for loans in forbearance provides stability and clarity to the $5 trillion Enterprise-backed housing finance market,” said FHFA Director Mark Calabria. “Mortgage servicers can now plan for exactly how long they will need to advance principal and interest payments on loans for which borrowers have not made their monthly payment.”
While welcoming the FHFA’s efforts to address the liquidity concerns, industry leaders continue to call for further action. Mortgage Bankers Association President and CEO Bob Broeksmit said in a statement:
While this news reduces servicers’ worst-case cash flow demands considerably, we continue to stress the need for the Treasury and the Federal Reserve to create a liquidity facility for those servicers who need it in order to continue to make payments to investors, municipalities, and insurers on behalf of borrowers who have been granted forbearance required under the CARES Act.