The Fate of the American Middle Class is in the Hands of Regulators

Last week, Congress passed phase three of its COVID-19 response, the CARES ACT, a $2 trillion stimulus package that has become most well-known for its direct payments of up to $1,200 for many Americans. These payments are a much-appreciated addition to the already enacted policies like the delayed tax deadline, deferred interest on student loan payments, updated paid sick leave policies, and other actions taken to ease the impact the pandemic is causing.

One of the policies that the media has largely neglected to cover is the impact of widespread forbearance – the term for when a mortgage servicer allows homeowners to temporarily pay at a lower rate or pause payments. During the current crisis, forbearance will serve as a significant relief for many middle and low-income families. The typical mortgage can add up to nearly 30 percent of the average American family’s income, and with many individuals temporarily out of work and impacted by COVID-19, forbearance allows those funds to be reallocated to immediate life-sustaining expenses like meals and medications.

Home ownership has long been a quintessential element of the American Dream. It is more than a place to live. It is a tangible path to the middle class – and arguably the greatest investment an individual can make. Furthermore, expanding access to home ownership is key to closing the gap between socioeconomic classes, providing new economic opportunities for families, and laying the foundation for success for aspiring homeowners.

However, an often unknown part of forbearance is that although homeowners around the country are receiving much needed relief, lenders and servicers are still obligated to pay principal, interest, taxes, and insurance, on the homeowner’s behalf. Given the nature of their business, this is potentially fatal for non-bank lenders.

Non-depository mortgage servicers have limited liquidity access. And depending on the duration of the crisis at hand, non-bank servicers will not have the liquidity to advance mortgage payments at the high rate that will be necessary. This presents a challenge, considering more than half of all mortgages in recent years came from non-depository lending institutions—including larger parts of loans made to low-income families. If a solution for non-bank mortgage lenders is not found, we could backtrack on nearly a decade of housing gains and relief efforts, and require further government intervention to prevent a mortgage crisis that could mirror the events of 2008.

Now that the CARES ACT has been signed into law, it is important that regulators take the opportunity to clarify forbearance policy to not only provide needed economic relief to impacted homeowners, but also lay out guidelines for mortgage lenders to navigate this unprecedented challenge.

Unfortunately, policymakers failed to provide lenders and servicers with access to the necessary liquidity in the CARES ACT and puts the issue in the hands of regulators. Hours after Congress’ omission of liquidity to non-depository servicers, Ginnie Mae announced plans to provide liquidity in the market for servicers within the next two weeks. While this is a step in the right direction, regulators must provide additional guidance to protect lower-income Americans and allow servicers to prepare for the coming months.

Servicers open the door for homeownership for many American families. These institutions play a key role in market diversification and provide new opportunities for a diverse group of borrowers.  It is essential that regulators and Congress work to ensure that non-bank lenders and servicers receive the necessary protections and have access to needed liquidity, allowing them to continue the important role they play in helping families realize the dream of homeownership.

Vincent J. Barnes, Senior Advisor
GrayGlobal Advisors, LLC
300 New Jersey Avenue, NW
Washington, DC

vbarnes@grayglobaladvisors.com
202-461-2100 Office
202-531-6005 Cell​

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