Fed Reserve Governor Michelle W. Bowman: The Changing Structure of Mortgage Markets and Financial Stability

An unfortunate consequence of the mortgage forbearance measure was the pressure it put on the funding needs of servicers, particularly mortgage companies, which are required to continue advancing payments on loans in forbearance. In April, Ginnie Mae alleviated these strains somewhat by announcing a program that provides servicers with financing for principal and interest advances, and which would not be considered a default by the servicer.4 Similarly, in April, the Federal Housing Finance Agency (FHFA) announced that servicers would be required to advance only four months of missed payments for GSE loans.5

Looking Back and Taking Stock
Although we continue to closely monitor the path of the virus and the public response to it, economic and financial conditions have improved much more than many had expected in the spring. It is a great relief that the most dire scenarios that seemed possible in the spring have not come to pass, which is largely due to supportive fiscal and monetary policy. In addition, the near-term stresses in financial markets have abated, providing support for the very strong recovery to date. The Federal Reserve's interest rate actions and MBS purchases have contributed to exceptionally low mortgage rates, which have boosted housing demand and the associated mortgage originations for new home purchases. We are also seeing a surge in mortgage refinancing. As a result, mortgage companies have experienced an influx of cash and an increase in profitability, and they have not had difficulties financing the advance payments.

To date, mortgage delinquencies and the take-up on forbearance appear to be limited and well below early fears of significant problems. The increase in employment since April, income support from stimulus payments, programs such as the Paycheck Protection Program that helped small businesses retain workers, and enhanced unemployment insurance all helped borrowers continue making their mortgage payments. And forbearance provisions in the CARES Act to homeowners with mortgages securitized by the GSEs or Ginnie Mae (around 65 percent of outstanding mortgages in the United States) have, so far, helped prevent foreclosures, which also supports home prices.

The share of mortgages in forbearance rose above 8 percent last spring, but it has since fallen to below 6 percent. And of those loans in forbearance, about one in six are current in their payments, reflecting the broader economic recovery.6 This improvement has not been uniform, though, and the decline in the forbearance rate for loans in Ginnie Mae pools has been slower than those in GSE pools. And, of course, significant uncertainties remain, including the fact that forbearance for federally backed mortgages is set to expire in the first quarter of next year.

Some Lessons Learned
Even as we take some comfort in these positive developments, we are also giving due consideration to the financial market vulnerabilities that were made evident in this crisis, and we are examining ways to address them. One prominent vulnerability, which I have described here today, relates to the funding and liquidity profile of mortgage companies. In different circumstances, the large-scale delinquencies and defaults we saw last spring could have caused some mortgage companies to fail, especially if the surge in origination and refinancing income had not materialized. Because many mortgage companies both originate and service mortgages, strains in these firms' servicing books could also weigh on their origination activities. As I noted a moment ago, any reduction in credit availability would be most acute for borrowers from traditionally underserved communities, where mortgage companies have a particularly high market share.

Even before the pandemic, regulators had widely recognized that the oversight and regulatory infrastructure for mortgage companies is much less well developed than for banks, and it could benefit from an update. To that end, Ginnie Mae announced new requirements for its servicers last year; the FHFA announced that it will propose updated minimum financial eligibility requirements for the GSE loan sellers and servicers; and, more recently, the Conference of State Bank Supervisors proposed a set of prudential standards for state oversight of nonbank mortgage servicers.7 And, finally, the Financial Stability Oversight Council has been working closely with regulatory agencies to analyze risks related to nonbank servicers and to facilitate coordination among agencies.8

An encouraging feature of all of these proposals is that they recognize the complexity of the mortgage company regulatory structure. The states are the primary regulators, but most large mortgage companies operate in multiple states and are also subject to counterparty requirements from the GSEs and Ginnie Mae. These proposals have all moved toward being more consistent with each other, which should reduce regulatory complexity and burden for mortgage companies and regulators.

The harder task, however, is thinking about what the overarching regulatory framework should be for mortgage companies. The risks that mortgage companies face are different from those that banks face. Mortgage companies will be more affected by shocks to the mortgage market than banks, which have much more diversified portfolios. As I have mentioned, mortgage companies have less access to liquidity than banks; at the same time, they do not pose the risk of a claim on the deposit insurance fund. These factors suggest that the optimal regulatory framework for mortgage companies should differ from that of banks.

These are difficult questions, and a casual observer might wonder if it is really necessary to grapple with them, especially as the industry appears to have successfully weathered the strains of the past few months. But I would argue that this "success" was reliant on rising home prices, low defaults, and massive fiscal and monetary stimulus. But we certainly can't count on all of these factors being present in future periods of economic stress.

Around the world, regulators are deliberating about how to address a variety of nonbank entities that can pose systemic risks. In work published last week, the FSB highlighted the need for a macroprudential approach to nonbank financial intermediation.9 Members of the FSB are not calling for bank-like regulation for nonbanks, but they recommend a framework of supervision and regulation that takes into account systemic risks that can be posed by nonbanks.

I would also note one lesson we learned in March, which is that conditions in financial markets can deteriorate very rapidly and unexpectedly. I'm paying close attention to the issues highlighted in my remarks today, and keeping an open mind. But I think it's clear, that doing the hard thinking and planning now—at a time when conditions afford us the time do so—is a very worthwhile investment. Our financial system and our mortgage market will be more resilient when they welcome and appropriately manage the risks associated with both bank and nonbank mortgage firms.

1. See You Suk Kim, Steven M. Laufer, Karen Pence, Richard Stanton, and Nancy Wallace (2018), "Liquidity Crises in the Mortgage Market (PDF)," Brookings Papers on Economic Activity, Spring, pp. 347–413; and Laurie Goodman, Alanna McCargo, Jim Parrott, Jun Zhu, Sheryl Pardo, Karan Kaul, Michael Neal, Jung Hyun Choi, Linna Zhu, Sarah Strochak, John Walsh, Caitlin Young, Daniel Pang, Alison Rincon, and Gideon Berger (2020), Housing Finance at a Glance: A Monthly Chartbook, October 2020 (PDF) (Washington: Urban Institute, October 27). The expansion of mortgage companies in this market partly reflects a decision by many banks to exit that market to avoid regulatory complexity and the financial, compliance, and reputational costs associated with default servicing and foreclosure. Return to text

2. The data are Federal Reserve Board staff calculations based on Recursion Co. (2020), Agency Mortgage Market Monthly Update, November. Return to text

3. See Financial Stability Oversight Council (2019), 2019 Annual Report (PDF) (Washington: FSOC, December), p. 42. Return to text

4. See Ginnie Mae (2020), "Ginnie Mae Approves Private Market Servicer Liquidity Facility," press release, April 7. Return to text

5. See Federal Housing Finance Agency (2020), "FHFA Addresses Servicer Liquidity Concerns, Announces Four Month Advance Obligation Limit for Loans in Forbearance," news release, April 21. Return to text

6. The data are from Mortgage Bankers Association (2020), MBA's Weekly Forbearance and Call Volume Survey, November 9. Return to text

7. See Ginnie Mae (2019), "All Participant Memorandum (APM)," webpage (Washington: Ginnie Mae, August 22); Federal Housing Finance Agency (2020), "FHFA to Re-Propose Updated Minimum Financial Eligibility Requirements for Fannie Mae and Freddie Mac Seller/Servicers," news release (Washington: FHFA, June 15); and Conference of State Bank Supervisors (2020), "Comments Requested: Prudential Standards for Non-Bank Mortgage Servicers" (Washington: CSBS, September 29). Return to text

8. See Financial Stability Oversight Council (2020), "Minutes of the Financial Stability Oversight Council: March 26, 2020 (PDF)" (Washington: FSOC). Return to text

9. See Financial Stability Board (2020), Holistic Review of the March Market Turmoil (Basel, Switzerland: FSB, November 17). Return to text

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Fed Reserve Governor Michelle W. Bowman: The Changing Structure of Mortgage Markets and Financial Stability

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