Fed governor: Mortgage finance system still vulnerable after COVID-19 chaos

Michelle Bowman, a member of the Federal Reserve’s board of governors, warned Thursday that the U.S. mortgage industry is vulnerable to a crisis that could send shockwaves through the broader financial system.

In a Thursday speech, Bowman said that while a combination of massive fiscal and monetary stimulus, rising home prices and low defaults helped prevent a coronavirus-fueled housing crash this year, major mortgage lenders could have failed and caused a credit crunch without it.

“We certainly can’t count on all of these factors being present in future periods of economic stress,” Bowman said, according to prepared remarks, during a conference hosted by the Federal Reserve Bank of Cleveland.

The coronavirus pandemic and the federal government’s response created a whirlwind of conflicting forces within the U.S. mortgage system. 

More than 22 million Americans lost their jobs in March and April, plunging households into uncertainty over whether they would be able to make mortgage payments.

In response, President Trump and Congress approved the $2.2 trillion CARES Act, which banned foreclosures on homes with federally backed mortgages. The bill also allowed any homeowner with a federally backed mortgage to to delay payments without fees or penalties by up to 180 days.

The forbearance provisions were crucial help for struggling homeowners, and U.S. commercial banks were largely able to bear the brunt of missed payments. But mortgage-only banks and servicing companies suddenly lost the revenue needed to pay investors who purchased bonds created with the home loans those companies originated.

Despite concerns and pleas for federal aid earlier in the year, mortgage companies found their footing. A combination of near-zero interest rates and federal stimulus helped spur a surge in mortgage refinancing and a massive recovery in home sales over the spring and summer. Low inventories of homes helped keep prices high enough to cover mortgage servicers’ losses.

Bowman said that the turmoil and fortunate recovery of the mortgage industry raised “difficult questions” about how to create a regulatory framework that supports access to home loans while mitigating the risks mortgage services face.

“In different circumstances, the large-scale delinquencies and defaults we saw last spring could have caused some mortgage companies to fail, especially if the surge in origination and refinancing income had not materialized,” she said.

“Our financial system and our mortgage market will be more resilient when they welcome and appropriately manage the risks associated with both bank and nonbank mortgage firms.”