How Fannie Mae's advance cap has impacted the market so far

The coronavirus-related cap on principal-and-interest advances Fannie Mae recently reconfirmed in its earnings call last week is beginning to revive some servicing-related markets.

Co-issue investors have become more active in response to the Federal Housing Finance Agency's announcement about the cap last month, for example.

Fannie's adoption of the cap was compelling to the market because of its scope. In the first quarter, it was the largest player in the new single-family mortgage-related securities market.

"There had been some co-issue buyers that had temporarily stepped out of the market," Mike Carnes, managing director of mortgage servicing rights valuations at MIAC, said during a recent IMN webcast about the state of the MSR market. "As soon as the FHFA announcement came out about the P&I advance requirements extending only through 120 days, I think it gave them the comfort to at least be able better project what their exposure might be, and by doing so, it did prompt some buyers to come back."

Conditions in the advance financing market have also improved, analysts at Keefe, Bruyette & Woods noted in a recent report.

"Over the past few weeks, servicers have announced an increase in financing facilities for servicing advances," the report states. "Companies have noted that financing for GSE P&I servicing advances have been fairly readily available."

But financiers may be deterred by the other risks servicers remain exposed to, such as their uncapped obligation to advance taxes and insurance on loans.

"There is still the stress of T&I advances," said Eric Edwardson, a partner at the law firm Mayer Brown. "People are still focused on those because those are going to continue on for the full duration of the forbearance."

As a result, the advance financing available may be quite costly.

"There is some private capital out there from private equity firms and hedge funds, but it's at a rate that's higher than people are used to borrowing at," said Kevin Brungardt, CEO at RoundPoint Mortgage Servicing.

The Term Asset-Backed Securities Loan Facility that was re-established to support credit flow to businesses and consumers during the coronavirus crisis will not finance servicing advances, according to KBW.

How helpful the Fannie Mae and Freddie Mac caps are to servicers should be evident by the third quarter, when the coronavirus crisis passes the four-month mark and the extended deadline for consumer tax bills arrives.

Under the terms of the coronavirus rescue package, borrowers with hardships related to COVID-19 can request to suspend payments for up to six months, with a one-time extension for up to another six months.

Fannie expects the current 7% single-family forbearance rate could more than double over time, even with economic activity to reviving as soon as June. Unemployment is expected to peak at 15% and still be as high as 7% by year-end, even if recovery occurs by midyear.

With these stresses on the market looming, servicers continue to seek additional government support to help them cover advances for the forbearances the rescue bill obligates them to provide.

"We're in effect being asked to be the bridge facility or the lender for those advances until such time that we can be reimbursed, and the number of those is going to be a big number," said Brungardt. "That could be very consequential later this year."