#58 - Local Governments Preparing for Mortgage Forbearance Crisis

Mortgage forbearance will rock local governments with fewer property tax payments being made by servicers and homeowners.  

Join host Sean Reynolds as he discusses why the property tax component of mortgage forbearance will impact local governments significantly in the coming months.    

The economic consequences of the COVID-19 pandemic are crystal clear, and so are the results of some efforts to alleviate financial hardships. Ginnie Mae and the Federal Housing Finance Agency have mandated servicers of FHA, VA, and GSE (Fannie Mae and Freddie Mac) loans to offer forbearance plans to their borrowers & this requirement was codified by Congress in the CARES Act. Borrowers using those plans have soared into the millions.

When the mandate was announced, there was concern about the advances of principal and interest (P&I) payments that servicers are required to make to investors in mortgage-backed securities even when borrowers are not paying on their loans. Servicers are also responsible for homeowner insurance premiums and property taxes.

When these advances are made servicers source the capital from their own balance sheet, typically in the form of a line of credit they hold with another financial institution or even with their own cash reserves. This arrangement is intended to be short-term as the outlays are eventually reimbursed by the applicable guarantor. Eventually, however, this can be a problem when forbearances are granted on a large scale, and liabilities may outstrip available assets of some servicers, especially the non-bank type who may hold less capital than bank servicers with their retail deposit base.

Both Ginnie Mae and FHFA have made program and policy changes to provide relief to servicers, especially for the P&I advances but little has been said about tax and insurance advances. 

The disruption to local municipalities who depend on property tax payments being made will be significant. 

Some of the top 20 (and many other) MSAs/Counties are already making contingency plans. Los Angeles County has not extended their expected liquidity date (ELD) for property tax payments but has announced the availability of workout plans for delinquent taxpayers. Philadelphia County has moved their ELD to July to give taxpayers extra time to make their payments and King County (Seattle) has extended its deadline for non-escrow account borrowers from April to June. these and other mitigation efforts suggest that municipalities are aware of the risk of a drop in property tax revenues and he expects mitigation efforts to spread over the coming weeks. 

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