Ratings Agency Says Non-Bank Mortgage Lenders Face ‘Intense’ Liquidity Crunch

WASHINGTON – The rating agency Moody’s downgraded its outlook for non-bank mortgage lenders in the U.S. from “stable” to “negative” on Thursday, warning the industry faces “intense” liquidity problems due to the ongoing coronavirus outbreak.

As previously reported in The Well News, nonbank lenders like ABC Mortgage and Quicken Loans originate about half of America’s home loans.

What’s more, they open the home-ownership door for many American families, including those in the nation’s minority and rural communities, said Antoine Thompson, executive director of the National Association of Real Estate Broker.

But because they don’t take in deposits like a traditional bank, they are particularly vulnerable when a dramatic downward swing occurs in the economy, like it has now.

“Because they are often most active in underserved and rural markets,” Thompson told The Well News.

“The last thing we want as a result of the COVID-19 crisis is for them to scramble for cash and go out of business,” he said.

Hanging over the industry is a right to forbearance for unemployed borrowers authorized in the $2.2 trillion economic stimulus package passed last week.

This could mean real trouble for nonbank lenders.

The reason is, typically, these lenders extend loans to homebuyers and then bundle them for sale on the bond markets, after the bundles have been insured by Fannie Mae and Freddie Mac.

For those who don’t know, Fannie Mae, is the Federal National Mortgage Association, which was founded during the Great Depression to expand the secondary mortgage market by securitizing mortgage loans in the form of mortgage-backed securities.

In practice, this securitization allows lenders to reinvest their assets into more lending and in effect increasing the number of lenders in the mortgage market by reducing the reliance on locally-based savings and loan associations. Fannie Mae’s “brother” organization is Freddie Mac, the Federal Home Loan Mortgage Corporation.

The problem for the non-bank lenders at the moment is that they must continue to make principal and interest payments to bondholders, even while their borrowers are in forbearance.

While the lenders will eventually be reimbursed by Fannie Mae and Freddie Mac, in the short-term they face the very real threat of having little or no cash on hand.

The industry is hoping for some relief in a future economic stimulus package, but the soonest the House would be able to work on one is April 20, its tentative date for returning to the Hill.

And even then, Senate Majority Leader Mitch McConnell has said he’s not interested in doing a fourth stimulus bill until the $2.2 trillion package passed last week has a chance to impact the economy.

Despite the fact they believe the nonbank lender’s liquidity needs will be met by lawmakers, the recent coronavirus-related developments appear to have been on Moody’s analysts’ minds this week.

“Our baseline scenario is that over the next several quarters non-bank mortgage firms will face ongoing liquidity stress, weaker profitability, as well as declines in capitalization and asset quality,” they wrote. 

Treasury Secretary Steve Mnuchin has said fixing the program is a priority for the administration, but so far no plan for the non-bank lenders has been forthcoming.

Mortgage lenders in the meantime, say the Federal Reserve needs to step in and provide liquidity to help them bridge the gap, but they are still awaiting word on exactly how that relief might be structured.

Moody’s also had concerns about how coronavirus will hit the profitability of the sector and therefore capital levels at some of the companies, particularly since delinquent mortgages cost more to service.

“Crisis-related market volatility and limits on production are eroding the already modest current profitability of non-bank mortgage companies,” the report said.

Though the analysts offered a silver-lining in their report: the possibility that activity in the sector could snap back to something approaching normal once stay-at-home orders are lifted, the report ended on a chill note.

“Looking ahead, we project that the curtailment of business activity worldwide will result in an unprecedented shock to the global economy,” the analysts said. “Our latest forecast is the US real GDP growth will contract 2.0% this year. Given the weakness in employment, the financial health of certain borrowers may not fully recover, leading to a rise in servicing costs.”

“The immediate concern with the decline in capital levels is whether the decline would breach a covenant in any of the non-bank mortgage companies’ funding agreements or with a counterparty such as Fannie Mae, Freddie Mac, or Ginnie Mae.”

Ginnie Mae, another agency that guarantees mortgage-backed securities, offered some relief to mortgage servicers last week, activating a program typically used after natural disasters to cover their payments on a temporary, emergency basis.