Thirty per cent of mortgages could default and Fannie Mae and Freddie Mac could require another bailout if lockdown stretches into summer, warn analysts
As many as 30 percent of Americans with home loans, or some 15 million households, could default if the nation’s economy remains closed through the summer, Mark Zandi, chief economist for Moody’s Analytics, wrote in a report.
That would be nearly triple the record delinquency rate of 11.54 percent in the aftermath of the Great Recession in 2010, wreaking havoc with the nation’s financial system.
After 10 million people filed jobless claims in the past two weeks, Zandi predicts that millions more will lose their jobs if the coronavirus pandemic shutdowns stretch out for months, destroying their ability to pay off debt.
Meanwhile, mortgage giants Fannie Mae and Freddie Mac would likely require a bailout if lockdowns last longer than 12 weeks, according to a federal official.
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, Mark Calabria, director of the Federal Housing Finance Agency, told Financial Times on Friday.
Nearly half of all U.S. mortgages are backed by Fannie Mae and Freddie Mac, which are offering payment relief to homeowners in the form of forbearance programs of up to 12 months for those who have lost income in the current crisis.
Calabria said that 300,000 mortgage holders under Fannie and Freddie had already requested relief from April 1 payments.
Since the two agencies own more than 40 percent of all mortgages that implies a total of 700,000 homeowners sought forbearance for April.
That number is expected to skyrocket in May, since many people were paid for part of March, but roughly 10 million filed unemployment claims in the final two weeks of the month.
Homeowners with the federally backed loans do not have to prove lost income to seek forebearance — a system that could lead to fraudulent claims, but is intended to speed up the process for seeking relief in the crisis.
But if the crisis continues for long enough, Fannie and Freddie could suffer extreme financial distress, as occurred in the implosion of the subprime mortgage market that triggered the Great Recession.
In that case, the two agencies were taken over by the federal government in a bailout that cost roughly $238 billion.
In the current crisis, Fannie and Freddie have also suspended all foreclosures and evictions for homes owned by their companies.
The agencies said on Monday they would freeze mortgage payments on sublet properties provided that landlords agree not to evict their tenants.
The eviction relief, announced by the Federal Housing Finance Agency that oversees Fannie and Freddie, aims to limit evictions by reassuring landlords that they will not be penalized if their tenants cannot pay the rent.
The relief is available to any multifamily property owners who have a mortgage that is guaranteed by Fannie and Freddie, which accounts for roughly 20 percent of the multifamily market.
Fannie and Freddie do not offer mortgages, but buy them from private parties, package them into securities, and guarantee them for investors.
The announcement followed a Sunday night move by the Fed and other banking regulators to clarify that bank examiners will not look harshly on bank efforts to modify loans for borrowers struggling amid the pandemic, so long as they are made in a ‘safe and sound’ manner.
Banks will not be required to categorize such relief as ‘troubled debt restructurings,’ which typically require banks to carry more capital to offset the risk.
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