Nonbank mortgage lenders like Quicken Loans face a potentially dire economic situation as countless Americans stop making payments on their home loans.
With the spread of the novel coronavirus (COVID-19) closing businesses and adding hundreds of thousands to the ranks of the unemployed, countless borrowers will be unable to pay their mortgages. Moreover, the federal government announced a moratorium on foreclosures for homeowners with mortgages backed by Fannie Mae or Freddie Mac, and Federal Housing Administration mortgages on single-family homes.
According to the Wall Street Journal, this sudden cessation of payments will force lenders to come up with tens of billions of dollars on short notice.
Quicken Loans, the Detroit-based lender owned by Dan Gilbert, was on track to issue $140 billion in mortgages in 2019. The business is a huge revenue-generator for the family of companies that includes Bedrock Detroit—the largest employer in the city.
Many of the loans issued by Quicken are backed by the federal government. But according to the Detroit Free Press, nonbank lenders have to advance payments to investors who own the mortgages. If there is a wave of non-payment, they could be in for a severe cash crunch—up to $100 billion or more.
The mortgage firms are lobbying congress for emergency funding to last through the period of forbearance granted to lenders by the federal government.
In a letter obtained by the Wall Street Journal, Mortgage Bankers Association Chief Executive Robert Broeksmit wrote to Treasury Secretary Steven Mnuchin and Federal Reserve Chairman Jerome Powell that mortgage payment leniency on a national scale “is beyond the capacity of the private sector alone to support.”
Since the 2008 housing crisis, nonbank lenders began issuing a greater percentage of mortgages in the United States. A study by the Brookings Institute noted that while this gave borrowers better access to credit, it also posed a greater risk, as “nonbanks are dependent on short-term credit to finance their operations, and this credit can become more expensive, or dry up entirely, when financial market conditions tighten.”