Mortgage Payment Holidays, Servicing Advances, and Fed Policy

The economic crisis sparked by the COVID-19 outbreak has led to mortgage debt relief policies in countries such as Spain, Italy, and the UK.1  On March 18, 2020, the Federal Housing Finance Agency directed Fannie Mae and Freddie Mac to suspend single-family mortgage foreclosures and evictions and provide forbearance and modification plans. But those fall far short of offering the sort of broad relief necessary for workers idled by COVID-19 because modifications cannot be executed quickly and forbearance typically requires that borrowers make up missed payments before becoming current.2  A national mortgage payment holiday, in contrast, could have positive effects on the economy at a manageable cost to the financial industry. 

Analysis of mortgage servicer advances gives a flavor for the necessary resources needed to implement a payment holiday. Advances are made when a servicer provides funds to RMBS investors as if a delinquent borrower, in fact, paid principal and interest on the loan as originally scheduled. Most RMBSs include advance provisions. In 2019, an estimated $2.5 billion per month was paid by servicers to investors through servicing advances.3  Ocwen, alone, reported over a billion dollars of outstanding advances in their most recent annual report. 

As delinquencies rise, advances grow rapidly. During the financial crisis delinquencies rose to 9.64% by the third quarter of 2009,4 suggesting that mortgage servicers were funding as much as nearly $6 billion per month (a 2.4x difference) on almost $60 billion of monthly principal and interest payments. Such pressures continued for some years, with Ocwen reporting nearly $4 billion in outstanding advances in its 2011 annual report.

Servicers usually fund advances through a form of credit facility.  In 2009, the Federal Reserve expanded its Term Asset-Backed Securities Loan Facility (“TALF”) to allow asset-backed securities collateralized by mortgage servicing advances to qualify as eligible collateral for Federal Reserve credit.5  TALF financing for advance facilities, however, was severely limited, hampered by negotiations with ratings agencies and large haircuts.6  In total, only five mortgage servicing advance ABSs with an aggregate balance of $1.7B were financed by TALF. 

Certainly, much more TALF assistance would be required to address income interruptions caused by COVID-19. Assuming as a base case that the number of borrowers who would qualify and take advantage of a targeted payment holiday (assuming the program could somehow be limited to existing delinquencies and those verified to be caused by the COVID-19 disruptions, leaving aside the difficulty of such a determination) would be similar to the number of homeowners who fell into delinquency as a result of the 2008 financial crisis, we can estimate monthly servicing advance needs of at least $5.6 billion monthly.

But the effect of COVID-19 is much more broad-based than that of the mortgage crisis. Comparing the GDP impact of the US financial crisis in 2008 to early estimates of 2020 GDP can help calibrate how much more expensive a basic TALF policy could be in 2020. In the third quarter of 2008, US GDP shrunk by roughly -8.4 %.7  Early outlooks for the second quarter 2020 US GDP growth have been reported to be between -5.0% and as low as -14.0%. Together, these figures imply a relative impact of one-to-one to as high as almost two-to-one in comparison to the financial crisis. Under the worst-case scenario, therefore, mortgage servicers could be required to fund up to $11.25 billion in monthly advances.

A three-month holiday for only those borrowers who were forced into delinquency as a result of the lockdown (ignoring the difficulties of making such a determination) could trigger up to $35 billion in required advances. Including all loans could require funding for some $180 billion in advances.

But since payments would not be made up at the end of the holiday, as with a typical forbearance, servicers would not recover the advances in the short term, but only when the mortgage ultimately prepaid or liquidated. Thus, a TALF-like liquidity backstop for bank and nonbank servicers would likely require long-term funding, not short-term liquidity, because there is no reasonable way to envision that servicer reimbursements will happen on a normal, short-term horizon. $180 billion is not small, but it is feasible, and would avoid additional unnecessary losses and delinquencies after the even has passed.


Requiring borrowers to “make up” missed payments would not make sense unless their earnings suddenly jumped to make up for time lost in COVID-19 isolation. See

3 Estimated from total US one-to-four family residence mortgage debt and MBA National Delinquency Survey data from 3Q 2019. Estimation assumes all delinquent principal and interest payments are advanced. See and



6 See


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