Detroit-based mortgage giant Quicken Loans could be facing a cash crunch in coming weeks and possibly need temporary emergency federal assistance if lots of borrowers stop making payments on their home mortgages during the coronavirus pandemic, according to a news report.
The Wall Street Journal identified Quicken Loans as one of the major firms that are bracing for a wave of missed mortgage payments that would require them to quickly come up with billions of dollars that they hadn’t planned on.
This liability would pertain to mortgages that Quicken Loans services. Those are mortgages for which Quicken collects the borrower payments, then passes the payments on to investors who own the mortgages.
Quicken Loans, which survived the Great Recession and real estate market collapse, greatly expanded its mortgage servicing portfolio in the 2010s yet is still better known for originating mortgages.
The company is one of Detroit’s largest employers and the biggest revenue-generator in the business empire of its founder Dan Gilbert.
Mortgage servicers typically must advance the planned mortgage payments to the investors — regardless of whether borrowers make the actual payments that are due. The servicers are also responsible for payments when borrowers are granted a forbearance, or temporary suspension of their mortgage payments.
Even though mortgage servicers are eventually reimbursed for those advanced payments by entities such as Fannie Mae or Freddie Mac that guarantee mortgages, there is a timing mismatch, which can result in a cash crunch.
The Mortgage Bankers Association, an industry group, this week warned the Treasury Department and the Federal Reserve that, under one theoretical scenario, should one-quarter of mortgage borrowers stop making payments or enter forbearance for six months or more, mortgage servicing firms could be on the hook for $75 billion to $100 billion or more.
“In normal and even stressed environments, such as a localized natural disaster, servicers can withstand this liquidity pressure,” Robert Broeksmit, the association’s chief executive, wrote in a letter this week to Treasure Secretary Steven Mnuchin and Federal Reserve Chairman Jerome Powell.
“Widespread, national borrower forbearance at the levels being proposed in response to the COVID-19 outbreak, however, extends well beyond any servicer advance obligations previously envisioned, and is beyond the capacity of the private sector alone to support.”
A Quicken Loans spokesman on Tuesday would not comment on whether the company is facing any potential cash crunch because of mortgage servicing. Quicken was among the first large companies in Detroit to have employees work from home in hopes of slowing the spread of the coronavirus.
“What I can tell you is that Quicken Loans continues to have record-breaking mortgage origination days and weeks,” Aaron Emerson, senior vice president of communications, said in an email. “This is occurring while more than 98% of our team members work from home.”
Liquidity facility
The mortgage bankers association is recommending that the Federal Reserve set up a temporary lending program for mortgage services to keep them solvent during the coronavirus crisis. The program — known as a “liquidity facility” — should be set up before mortgage servicing companies are in a state of emergency, the association says.
The association’s letter described general conditions for mortgage servicers and didn’t name specific firms.
“Virtually no servicer, regardless of its business model or size, will be able to make sustained advances during a large-scale pandemic when a significant portion of borrowers could cease making their payments for an extended period of time,” Broeksmit wrote.
Last week, government-backed mortgage enterprises Fannie Mae and Freddie Mac announced they would suspend foreclosures and evictions for 60 days for borrowers impacted by the coronavirus crisis. Many of Quicken Loans’ mortgages are guaranteed by Fannie and Freddie and other government-backed enterprises.
Quicken pools the mortgages that it originates and bundles them into securities, which it then sells into the secondary market.
A representative for Pontiac-based United Shore, another major mortgage firm in metro Detroit that also services mortgages, could not be reached for comment.
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