When you own a house, most hope that they never have to know too much about the intricacy of the home’s plumbing system. Odds are, if there’s a plumber at your home telling you about how your waste line connects to the public sewage system, it’s not a good thing. The financial system has a lot of plumbing that, like the plumbing in your house, if you hear about it, there’s a big problem. Currently the Fed, through different financing facilities, is plugging a lot of leaks and cracks in the system caused by COVID-19. Most of the solutions are from the 2008-2009 playbook. However, there’s a huge “plumbing problem” in the mortgage market that so far has not been addressed in full.
The last crisis was centered on mortgages that were underwritten to fail. The latest crisis has to do with the ability to service perfectly good mortgages sold to Fannie Mae, Freddie Mac, and Ginnie Mae that have been packaged into the Fannie Mae, Freddie Mac, and Ginnie Mae mortgage-backed securities (“Agency MBS”). Any payment disruption to the $11.5 trillion Agency MBS market caused by the failure to service would be catastrophic on a global scale. Since we are all full-up on catastrophic right now, another event—especially one that can be avoided—is “unwelcome.”
Mortgage lenders who are approved “seller-servicers” for Fannie, Freddie, and Ginnie are paid a monthly fee to collect principal and interest (P&I), hazard insurance, and local real estate taxes from mortgagees. They remit the P&I to the appropriate agency, who in turn passes the P&I to bondholders. The taxes and insurance portion of the borrower’s monthly payment is put into escrow with the servicers responsible for making sure the insurance and taxes are paid. In many cases, the mortgage lenders service their own production.
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