It’s an unprecedented measure in keeping with the unprecedented nature of the economic crisis ahead.
The arithmetic doesn’t work. Only the very largest, best capitalized servicers would be able to handle that kind of strain. The rest would falter, and many would fail altogether.
The fate of these companies matters to the rest of us because they are the ones that pick up the phone to help borrowers struggling to pay their mortgage. Widespread failure by mortgage servicers would throw this system into complete chaos. Many struggling homeowners would be left with nowhere to turn, as regulators scramble to find someone else to take on the servicing of their loan. All of this would happen while servicers nationwide are struggling to handle the customers they already have.
Compounding the problem, mortgage servicers also make mortgages. So their widespread failure would mean that many families will have a much harder time getting a loan to buy a home or refinance their mortgage, casting a heavy cloud over our economic recovery once the virus passes.
So policymakers have a choice. They can step in now and address the massive cash-flow problem faced by mortgage servicers, either by advancing these payments directly to investors or by lending servicers the money to do it themselves. Either way, the cost would pale in comparison to bailing out the housing market should the stress on this sector be as bad as many fear. Or they can wait and see how things play out, crossing their fingers that the coming wave of forbearance doesn’t do that much damage — that it only knocks over the first few dominoes.
If the choice sounds familiar, it should. It is not unlike the choice that policymakers faced when first learning of the virus a few months ago: heed to the warnings of experts and move aggressively to stave off a crisis, or take their chances and hope that things won’t be as bad as feared.
Surely, we won’t make that same mistake again.
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