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How the CARES Act Affects Mortgage Collections

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Mortgages have become a bit more complicated than they were just a few short months ago. Economic uncertainty surrounding the COVID-19 pandemic combined with government mandates have turned the mortgage industry upside down virtually overnight. Borrowers and lenders alike are finding it difficult to make sense of this new environment, and the mortgage industry stands to suffer due to a lack of foresight.

The CARES Act Leaves Mortgage Servicers Behind

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, which President Trump signed into law on March 27, offers up to a 12-month reprieve to some homeowners. Borrowers with Government Sponsored Enterprise (GSE) or federally-backed mortgage loans (FHA, VA, USDA, Fannie Mae, Freddie Mac) that have been economically impacted by COVID-19 can request a 180-day forbearance with an option for an additional 180 days. Borrowers cannot be charged any additional penalties, late fees, or interest beyond what is in the terms of their mortgage contract.

Borrowers that don’t have GSE or federally-backed mortgages may still have relief options from their state or through their mortgage servicer. Many private lenders are also offering forbearance options, and most states have stopped processing foreclosure cases temporarily.

While the CARES Act is a welcome relief for the millions of Americans that have found themselves unemployed or underemployed due to COVID-19, it has also created hardship for mortgage servicers. Now that these companies are no longer collecting the money they need to pay bondholders, many are finding themselves in a cash crunch. Further, these difficulties mean that mortgage companies will also not have the ability to make new loans.

If the situation gets bad enough, it’s entirely possible that the U.S. could be heading towards another mortgage crisis. Even though rates are low, lenders will have to raise borrowing standards, which is something that JP Morgan Chase has done, and more borrowers will be unable to qualify for home loans.

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Potential Relief on the Horizon for Mortgage Servicers

Unfortunately, the business relief in the CARES Act doesn’t provide any bailout money for mortgage servicers. Unless some provisions are made for this sector, the mortgage industry could be in trouble.

As a small first step, Ginnie Mae announced that it planned to implement a system that would allow mortgage servicers to apply for advances. The system, generally used after natural disasters, would help servicers make scheduled payments to investors.

While Ginnie Mae’s program is helpful, it may not be enough. Some in the industry are calling for Federal Reserve to create an emergency lending program for mortgage servicers. Even though the Fed has established several new emergency lending facilities in response to the pandemic, it hasn’t responded with respect to the brewing troubles in the mortgage space.

A shortfall undoubtedly exists with the current plan, which threatens the survival of many mortgage servicers. U.S. Treasury Secretary Steven Mnuchin recently announced the creation of a task force as part of the Financial Stability Oversight Council (FSOC). The new task force will monitor nonbank mortgage servicers to address any industry liquidity challenges that could impact the economy.