The COVID-19 pandemic is wreaking havoc across the global economy and throwing everything from scheduled events to payments into disarray. The latter of particular concern to financial markets given how many securities rely upon the steady and consistent flow of payments from borrower to lender. That is why federal housing giants Fannie Mae and Freddie Mac are moving forward with guarantees about mortgage payment freezes in exchange for a ban on evictions until the economy stabilizes.
The U.S. Federal Reserve is adjusting rules to keep lending channels open during the pandemic which would allow borrowers to get relief from payments as long as tenants are not being removed from their homes. Announced by the Federal Housing Finance Agency (which oversees Fannie Mae and Freddie Mac), the rules adjustment is meant to give borrowers confidence that they will not suffer penalties if their tenants cannot pay during the crisis.
Part of a broader relief package being crafted by the Treasury Department in coordination with the White House and both chambers of the US Congress, the new rules should give relief to both parties while maintaining the integrity of the system underpinning it all. This package of rule changes will be gradual and is aimed specifically at the 20% of mortgage holders for so-called multifamily properties. Joining last week’s FHFA announced 60-day hold on foreclosures for single-family mortgages, the inclusion of multifamily properties merely extends the protections enjoyed by the agencies’ other borrowers.
To give some idea of the scale of the 60-day freeze on foreclosures, Fannie Mae and Freddie Mac hold about half of all of the outstanding mortgages on the market. HUD Deputy Secretary Brian Montgomery said of the move, “For the time being, it just hits the pause button and provides steadiness to the housing market. This is a first step; people who were concerned about [losing their homes] can cross that off their list for now.” Though the agencies do not themselves issue mortgages, they purchase them from financial institutions and bundle them together into investment packages, Reuters points out.
The housing market, and Fannie Mae and Freddie Mac, played a particularly critical role in the downturn of 2008 and lawmakers are especially keen to make sure the sector does not add to the current problems faced by multiple industries. Though the causes of the 2008 crisis and the present situation are markedly different, there is still a heavy amount of market distrust and wariness over mortgages and the securities tied to them. Calming investor fears during this time could help stymie a run on other parts of the economy it is hoped.
These changes came on the heels of Fed signals that they would not be looking very harshly at banks restructuring loans during this time. Typically, restructuring a home loan requires a bank to hold more capital to ameliorate the perceived increased risk in the loan.