Next month, millions of Americans will skip their mortgage payments. Those who lost their works due to the Covid-19 crisis, do it without penalty, under the bailout law passed last month. This throws a lifeline for struggling Americans, nearly 17 million of whom have filed for unemployment first in the past three weeks.

But the payments are not forgiven. They will be met later, most likely by extending the term of the loans. They also cannot be forgotten, not even temporarily. So who will replace the missing money?

In the United States, most mortgages are not a simple agreement between a borrower and a lender. Instead, millions of borrowers are tied to thousands of bondholders by a complicated financial machine. The fact that the machine will continue to make regular payments to bondholders is implicitly guaranteed by the US government.

The Mortgage Bankers Association has estimated that if 25 percent of mortgage holders took advantage of forbearance for six months, missing payments could reach $ 100 billion or more. Who will replace the missing money has become controversial, for reasons highlighted by a brief tour of the machine itself.

The initial entry to the machine is, of course, homebuyers who borrow money from mortgage lenders. However, the majority of these lenders will only hold the loans temporarily. Most of them are not even banks and would not have the balance sheet capacity to do so for long.

Rather, the bulk of mortgages are resold to other financial institutions, who package them into securities for sale to investors in the capital markets. About half the time, this financial institution is one of the so-called government “agencies”, Fannie Mae and Freddie Mac.

Nominally private companies, but long backed and majority-owned by the government since the last crisis, the agencies are doing two things. They take a fee in exchange for guaranteeing the performance of the mortgages and pool them into trusts, which in turn fund marketable securities. There are almost $ 5 billion in circulation.

This is not the end. The machine is kept in good working order by mortgage service companies. In many cases, these are the same companies that originate the loans, such as Quicken Loans or United Wholesale Mortgage. In exchange for a commission, providers receive monthly payments from the borrower and remit them to investors.

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But the key fact – and the source of the current controversy in Washington and in the mortgage market – is that agents are still responsible for advancing payment to investors when borrowers miss a payment. The agencies ultimately guarantee the execution of the loans, but they only intervene and reimburse the repairers after a complex process that can take months.

At the moment, therefore, the repairers are providing the money to pay for a loan forbearance program that has been enshrined in law by the US government.

Repairers may be able to continue doing this for a few months, thanks to a recent surge in refinancing activity that has inflated their cash reserves. But if the coronavirus crisis continues for an extended period, some of these companies may not have the cash to stay afloat.

Repairers want help, of course, and they have political support. A bipartisan group of senators sent Treasury Secretary Steven Mnuchin on Wednesday a letter request for support for industry.

But so far, help is not on the way. In a maintenance with the FT, the regulator in charge of Fannie and Freddie, Mark Calabria, clarified that the support would not come from the agencies.

One possibility that has been suggested in the industry is that advances from repairers to investors – in effect, receivables owed by the U.S. government – could be securitized and exchanged for funding from the government. Federal Reserve.

Fed Chairman Jay Powell said on Thursday that the Fed is “closely monitoring the situation with mortgage agents.” But advances from repairers have so far not been included in the Fed’s TALF asset finance program, which now buys securities backed by everything from credit card receivables to student loans.


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