As the residential mortgage community is aware, loan servicers are facing significant financial burdens from the servicing advance obligations associated with the loan forbearance mandates of the CARES Act. Over the past few days, there has been considerable reporting and reaction to the statements by the Director of the Federal Housing Finance Agency that Fannie Mae and Freddie Mac will not provide financial assistance to servicers facing these burdens. On the heels of those statements, the Federal Reserve has unfortunately eliminated another potential source of support for those servicers.
On April 9, 2020, the Federal Reserve issued a revised term sheet for its Term Asset Backed Securities Loan Facility (“TALF 2020”), updating a term sheet initially released on March 23, 2020. TALF 2020 is a new version of the asset backed securities facility originally created in the wake of the financial crisis (“TALF 2008”). Both TALF 2008 and TALF 2020 involve the Federal Reserve providing funding for loans to finance the purchase of certain asset backed securities. The goal of that financing is to support and encourage private lending to households and businesses though loans that can be pooled to back the government-financed securities.
TALF 2008 included financing for the purchase of securities backed by residential mortgage servicing advance receivables. Although TALF 2008 wasn’t extensively used for that servicing advance financing, it encouraged the emergence of private lending for the same purpose. In its initial term sheet for TALF 2020, the Federal Reserve again included residential mortgage servicing advance receivables among the categories of eligible collateral, indicating that it intended to similarly assist with the servicers liquidity needs arising from the current COVID-19 pandemic and government mandated loan forbearances.
Sometime over the course of the next 17 days, however, the Federal Reserve changed its mind. It deleted servicing advance receivables from the list of eligible collateral in the updated term sheet issued on April 9th. This not only removes TALF 2020 as a source of funding, but also eliminates the support for the private servicing advance financing market that TALF 2008 provided.
The Federal Reserve hasn’t said why it removed serving advance receivables as eligible collateral. The optimists of the world may hope this signals that the Federal Reserve plans to engage in a separate program to specifically assist residential mortgage loan servicers with their liquidity needs. The pessimists may believe this is merely a continuation of the federal government’s apparent resistance to supporting the servicers in fulfilling the government’s own loan forbearance mandate.