At this writing, HUD and the GSE’s are operating with an August 31,2020 sunset on the foreclosure moratorium that was put in place at the beginning of the coronavirus crisis. Its time all stakeholders get serious about what comes next. We at SP Group have identified three steps that we believe will effectively address the anticipated increase in loan defaults. They are:
1. Kick the Can Down the Road – A Pragmatic Policy Option
Policymakers have the option of extending the foreclosure moratorium for some period of time. Extending the moratorium may be necessary to allow enough time for the other options that we propose to be implemented. Congress will need to provide funding sufficient to support the GSEs and loan servicers to make payments to bond holders and to units of government for taxes and for insurance coverage. Extending the moratorium until January, 2021 should provide sufficient time to implement Step 2.
2. Rev-Up Tried and True Loss Mitigation and Loan Modification Programs – Start With What Worked
In a recent survey, Altisource found that 91% of the mortgage industry experts believed that once the moratoriums end, borrowers won’t have to pay back the forborne payments at one time, otherwise it would negate the benefit of having the forbearance relief. There will be loss mitigation programs for the federally backed loans.
We have learned a lot from the 2008 housing crisis. It took years for the banking industry to implement HAMP and HARP programs. While HAMP and HARP did contribute to staunching the flood of foreclosures and the stabilizing of housing markets, these programs did not contain any type of cost recovery. Had mechanisms been put in place to recover a portion to the taxpayer cost, estimated at approximately $500 billion, these programs would have been far more effective than they were. We recommend that when structuring programs in the future that policymakers consider methods for involving private capital and structuring transactions that will result in the return of taxpayer dollars that are devoted to assisting distressed homeowners.
3. Build Upon the Co-Investment Equity-Sharing Model Using Securitized Investment Facilities
The April 2020 Black Knight Mortgage Monitor Report appropriately highlights the increased level of equity throughout the broader housing finance system when compared to the Great Recession. Some of that equity most certainly accrued since the housing price collapse of 2008-2009. This observation supports the suggestion that that which goes down, will eventually go back up. There are future equity gains to be had in the American housing market.
Therefore we propose that investors take advantage of co-investment strategies for financing housing by developing an investment vehicle to provide temporary mortgage payments to homeowners experiencing the impact of COVID-induced unemployment in return for a share of future price appreciation of the collateral property. If implemented in carefully chosen markets, risk can be mitigated by selecting loans in resilient local economies with an identifiable growth potential. Investor yields can be structured to address a range of loan performance scenarios, and hurdle rates.
We recommend that FHA and the GSEs develop co-investment programs to address the liquidity needs of borrowers in less resilient markets. These programs can use a variety of incentives or supports for private sector investment, including but not limited to cash co-investment using a public/private model, or some type of credit enhancement or guarantee support. Most certainly, these activities would fall within the realm of HUD’s mission or the FHFA’s duty to serve mandate.
As an experienced advisor in the non-performing loan (NPL) space, SP Group is prepared to assist in designing and structuring innovative solutions to the challenges of the post-COVID residential loan environment. Whether it may be opportunistic investment strategies for investors or pragmatic programs for agencies of government, our analytics capabilities and our ability to recognize and balance the objectives of private and public stakeholders are the necessary elements of success.