Today, the Federal Housing Finance Agency (“FHFA”) announced an eagerly awaited policy allowing Fannie Mae and Freddie Mac (the “Agencies”) to address one aspect of the liquidity crisis for mortgage servicers facing mounting advance obligations due to forbearances. Going forward, once a servicer of single-family mortgage loans pooled into an Agency mortgage-backed security has advanced four months of missed payments on a loan in forbearance, it will have no further obligation to advance scheduled payments of principal and interest.[1] The FHFA reports that this applies to all Agency servicers.

This answers one of the four main questions that servicers have asked about forbearance required under the CARES Act in the context of Agency servicing advances. Whether a servicer has to advance for forborne payments is the first question. If so, for how long, is the second question. Third, when will a servicer be reimbursed by the Agencies for such advances. Last, will the Agencies, directly or through the Federal Reserve Board or Department of Treasury, provide a liquidity facility or financing for required advances?

The answer to the last question appeared relatively clear, as FHFA Director Mark Calabria had resisted providing any such relief, announcing two weeks ago that there were no resources or plans to offer a liquidity facility. He indicated that servicers in distress could simply become subservicers or transfer servicing to others without significant disruption.  Director Calabria’s remarks drew quick disagreement from the mortgage industry and many Republicans and Democrats in Congress.  Whether this push back will produce results is not clear at this point. Nevertheless, as to the second question, we have a positive answer—namely, Director Calabria stated that “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.”

This statement from the Director is welcome for three important reasons. First, with billions of dollars in potential advance obligations in the balance, clarity regarding GSE advance requirements for loans in forbearance is, on its own, a welcome and necessary development (determining these obligations from the respective Agency Servicing Guides was, at best, extremely complicated). Second, if and to the extent one could discern the applicable advance requirement for loans subject to forbearance, the duration of advancing, at least for Fannie Mae, could extend significantly longer than would be the case for delinquent loans.  Third, FHFA is synchronizing the requirements between the two Agencies and using Freddie Mac’s seemingly shorter advance requirement than the potentially longer Fannie Mae requirement.

As welcome as this announcement is, and it certainly is welcome and appreciated, it does not resolve the third fundamental question of when a servicer is reimbursed for its advances. The requirements for Freddie and Fannie appear to differ, and there is a continuing industry concern over how long servicers will have to carry the receivables on their balance sheet, even if they are able to obtain a liquidity facility to finance the advances.  In this regard, the term of a liquidity facility may be materially shorter than the potential time frame for reimbursement of such advances by the Agencies. Hopefully, these standards also will be synchronized, with the shortest time period that reasonably is feasible.

In addition, servicers will still face significant liquidity pressure that will need to be addressed due to the increasing demand for forbearance with virtually no eligibility requirements. Moreover, this new policy does not address the continuing requirements to make escrow and potentially certain types of corporate advances on the loans in forbearance and the timing of reimbursement.

FHFA also announced that Agency loans in mortgage-backed security (“MBS”) pools will remain in the pools for at least the duration of the forbearance plan. Similar to the Agencies’ natural disaster policies, those loans will not have to be purchased out of the pools. While this may not impact servicers, it does avoid an adverse effect on prepayment speeds for the MBS that would result from massive repurchases of loans subject to forbearance.

While the concept of time is warped during this pandemic, servicers have waited seemingly forever for this announcement – squeezed by having to offer borrowers forbearance while still having to make advances of principal, interest, taxes, and insurance. They received some good news on April 10th, when Ginnie Mae announced the final terms of its Pass-Through Assistance Program for issuers (the “PTAP/C19”), which Mayer Brown analyzed in its Legal Update. On April 9th, the Federal Reserve issued a revised term sheet for its Term Asset Backed Securities Loan Facility (“TALF 2020”), which may provide some relief in the asset backed securities markets (once the details get ironed out).

 

[1] Fannie Mae servicers are responsible for advancing principal and interest payments in respect of loans in MBS, regardless of borrower payments.  Freddie Mac servicers are generally only responsible for advancing scheduled interest.

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