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Servicer liquidity support may not carry over into next downturn

HousingWire warns that if inflation keeps the Fed from cutting rates, new liquidity backstops may be needed to prevent servicer failures during the next housing downturn.

Reported · Written up by our desk · Residential

HousingWire argues that the pandemic reduced the severity of any housing recession largely because a governmentwide response let millions of households stay in their homes through mortgage forbearance and modification options for distressed borrowers.

The outlet says those tools came with costs that mortgage servicers absorbed, supported by a historic refinance boom that followed the pandemic and by Federal Reserve actions that lowered mortgage rates, which improved both borrower affordability and servicers' operating capital for loss mitigation.

However, HousingWire cautions that in an inflationary environment, the Federal Reserve may be unable or unwilling to fund additional relief by lowering the cost of credit, removing a key backstop that supported servicer liquidity in the last downturn.

The analysis adds that borrowers are showing increasing signs of stress and that independent mortgage banks have faced years of lower mortgage activity as many borrowers stayed “locked-in” to pandemic-era mortgages, leaving the system potentially more vulnerable without new vehicles to provide servicer liquidity in a future downturn.

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