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Who Gets Hit by Mortgage Losses in Harvey and Irma Areas?

Summary:
“We need to ask for a policy change because the burden with these losses is too big.” Somebody is going to pay for losses on mortgages of homes that were destroyed by Hurricanes Harvey and Irma. It’s a just a question of who. The taxpayer is on the hook, along with some investors. But then there are the servicers of mortgages guaranteed by the Government National Mortgage Association, for short Ginnie Mae. The largest of them is Wells Fargo, but they mostly include smaller non-banks such as PennyMac and Quicken Loans. The amounts could be large. And now they’re asking for a bailout of sorts. In total, 4.3 million properties with nearly 0 billion in outstanding mortgage balances are located in FEMA-designated disaster areas in Texas and Florida, according to a preliminary estimate

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“We need to ask for a policy change because the burden with these losses is too big.”

Somebody is going to pay for losses on mortgages of homes that were destroyed by Hurricanes Harvey and Irma. It’s a just a question of who.

The taxpayer is on the hook, along with some investors. But then there are the servicers of mortgages guaranteed by the Government National Mortgage Association, for short Ginnie Mae. The largest of them is Wells Fargo, but they mostly include smaller non-banks such as PennyMac and Quicken Loans. The amounts could be large. And now they’re asking for a bailout of sorts.

In total, 4.3 million properties with nearly $700 billion in outstanding mortgage balances are located in FEMA-designated disaster areas in Texas and Florida, according to a preliminary estimate by Black Knight Financial Services:

  • Disaster areas of Hurricane Harvey: 1.18 million mortgaged properties with $179 billion in unpaid mortgages.
  • Disaster areas of Hurricane Irma: 3.14 million mortgaged properties with $517 billion in unpaid mortgages.

Many of these homes survived mostly unscathed. So the mortgage balances of homes that have been severely damaged or destroyed remain uncertain but are significant.

And who picks up the losses on these mortgages?

  • Federal flood insurance for insured homes, but payouts are capped. Taxpayers will bail out the insurance program.
  • Investors in private mortgage-backed securities (MBS) backed by mortgages that are not guaranteed by the government. Losses on those mortgages flow through to investors.
  • Banks take the losses on any mortgages they hold on their books and that are not guaranteed by the government.
  • Government Sponsored Enterprises (GSE), such as Fannie Mae and Freddie Mac, will be hit with losses on mortgages they guaranteed, packaged into MBS, and sold to investors. Some of the losses will be borne by private-sector investors via risk-transfer securities. The remaining losses will be borne by taxpayers.




But then there are mortgages guaranteed by Ginnie Mae.

They’re unique. Ginnie Mae is part of the Federal Housing Administration (FHA), which is part of the Department of Human Services (HUD). Like the GSEs, Ginnie Mae guarantees mortgages, packages them into MBS, and sells them to investors. But according to Debtwire, there is a big difference.

These mortgages under HUD have a conveyance policy that, among other things, requires the mortgage servicers – banks and non-banks – to maintain the property in good condition, according to Debtwire, “before they can be conveyed to the agency, leaving the servicer on the hook when insurance doesn’t cover losses.”

So how big of a problem is this?

The Ginnie Mae’s portfolio of single-family and multi-family MBS has soared 112% since 2009 to $1.87 trillion!

These are the largest Ginnie Mae servicers, according to Debtwire. Their exposure to Texas ranges from 5% to 10% of their portfolio:

  • Wells Fargo, the largest one, followed by non-banks:
  • PennyMac
  • Blackstone Group’s Lakeview Loan Servicing
  • Freedom Mortgage
  • Quicken Loans
  • Nationstar Mortgage
  • Carrington Mortgage Services
  • Lone Star Funds’ Caliber Home Loans.

Now they’re clamoring for an “exception” to the conveyance rule. According to Debtwire, citing “two sources familiar with the effort,” they’re “considering an appeal for relief from a US government policy that leaves them on the hook when a property is irreparably damaged.”

“For someone that does large FHA volume, it’s a serious concern,” said one source. “We need to ask for a policy change because the burden with these losses is too big.”

Ginnie Mae’s former president and now a senior fellow at the Milken Institute’s housing finance program, Ted Tozer, explained that non-bank servicers that are less diversified and that, according to Debtwire, “have feasted on the Ginnie Mae servicing shed by banks in recent years,” are particularly vulnerable. At the top of his worry list are smaller, regional servicers with heavy concentrations in hurricane-damaged areas.

“That’s what scares me,” he said. “These other guys could sell off some other servicing. They have other tools in the toolbox.”

Two sources told Debtwire that Ginnie Mae servicers “think they have a good case to seek exceptions to the conveyance policy because it’s unique to HUD.

But Tozer is skeptical about even a one-time policy exception because the concept of a servicer maintaining the properties is “critical” for government loan programs, he told Debtwire.

He pointed at an additional hurdle: Some officials at the agency that would have to be involved in such a change in policy haven’t been appointed yet.

Citing a source, Debtwire said that servicers “may also be stressed by the advances they’re required to make on loans that are not current.” Days after Irma, according to a source, “one top servicer had already granted thousands of forbearances as part of its immediate response to homeowners.”

The “number one priority is to get those customers the help they need,” the source said. “But the dialogue behind the scenes” is focused on dealing with the conveyance costs, the source said.

Ginnie Mae has already asked services “in need of assistance” to contact the agency “as soon as possible so we can guide them through this difficult period.” Assistance is available for issuers with more than 5% of their portfolios in the disaster areas. This assistance could take three forms:

  1. Aiding Issuers in covering their advance obligations while forbearing from declaring them in default.
  2. Deleting affected loans from calculations of delinquency ratios.
  3. And authorizing Issuers to purchase affected loans from the related pools.

Note the second item – and what it means for data we see down the road: those mortgage defaults will likely not show up in the national number of mortgage defaults.

Much uncertainty remains. But one thing is clear: The devastation from Hurricanes Harvey and Irma on the ground will have deep and far-reaching financial consequences far beyond the disaster areas for years to come.

Here’s a look at the breath-taking differences in a vast country. Read…  The 30 Metros in the US with the Highest and Lowest Incomes




Wolf Richter

Founder, Wolf Street Corp.

In his cynical, tongue-in-cheek manner, he muses on WOLF STREET about economic, business, and financial issues, Wall Street shenanigans, complex entanglements, and other things, debacles, and opportunities that catch his eye in the US, Europe, Japan, and occasionally China.

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