Fannie Mae and Freddie Mac, the government-controlled companies that guarantee nearly half of US mortgages, could require their second bailout in just over a decade if the US economy remains in a lockdown for several months, their regulator has warned.
The two groups, which collectively underpin the $10tn US housing market, have sufficient resources to last through a lockdown of about 12 weeks, but would then need funds from Congress or the Federal Reserve, said Mark Calabria, director of the Federal Housing Finance Agency.
“If we start to go more than two or three months, then there is going to be real stress in the mortgage market, we’re talking in terms of what happened during the great recession,” he told the Financial Times.
“If we are talking about a drawn-out period where people are not in a position to pay their mortgages, if we are talking about 25 per cent of people having to ask for forbearance, the system doesn’t have that kind of liquidity. That would require Congress to step in, or the Fed.”
Mr Calabria’s warning underlines the potential consequences for the US economy if the current coronavirus-related shutdowns persist beyond summer, as many health experts warn.
Donald Trump, the US president, has said national social distancing guidelines would remain in place until the end of April. But many epidemiologists say they will have to be extended.
Almost 10m Americans have claimed unemployment benefits in the past two weeks, and Congress passed a bill allowing homeowners to forego mortgage payments for up to a year.
About 300,000 borrowers had asked for forbearance on loans backed by Fannie and Freddie as of April 1, Mr Calabria said. Since the agencies make up more than 40 per cent of the mortgage market, he said that implied a total of perhaps 700,000 homeowners seeking forbearance.
He said that number was likely to rise: “A lot of people got paid for half of March, so a lot of people who were able to make their payments in March won’t be able to make their May payment.”
Those seeking help did not tend to be those who had struggled to make payments in the past. “So far, forbearance is going to borrowers who have always paid on time,” he said. “This is someone who has hit a short-term hardship but has an intention to stay in that house.”
Homeowners do not have to prove that they have lost income before being granted a mortgage holiday. That provision would speed up assistance, Mr Calabria said, but could lead to fraudulent claims.
“We are operating on an honour system here,” he said.
One focus of concern in the industry and in Washington is the mortgage servicers, often banks and non-bank mortgage lenders, responsible for collecting payments from borrowers and passing them on to investors. They are still required to make the payments when borrowers take advantage of forbearance, and are not compensated by Fannie and Freddie for six months, potentially leaving many facing a liquidity crunch.
Mr Calabria said that while various solutions were under discussion, additional funds for the servicers would not be coming from Fannie and Freddie, which were placed in a government “conservatorship” during the financial crisis of 2008.
“I’m not the Fed,” he said. “Fannie and Freddie are still in conservatorship and levered 240 to 1. We need all the capital we can muster for ourselves.”