Non-Bank Lenders put on Downgrade Watch

Financial Times writers Billy Nauman, Robert Armstrong and Laura Noonan reported last week that, “US non-bank lenders, which originate half of America’s home loans, are facing financial pressure and ratings downgrades as they await clarity from the federal government about how to deal with mortgage payment forbearance.

“Rating agency Moody’s switched its outlook for non-bank mortgage lenders in the US from ‘stable’ to ‘negative’ on Thursday, warning of the ‘intense’ liquidity pressures.

“‘Our baseline scenario is that over the next several quarters non-bank mortgage firms will face ongoing liquidity stress, weaker profitability, as well as declines in capitalisation and asset quality,’ the analysts wrote.”

The FT article stated that, “The non-bank lenders typically make loans that they then bundle and sell into bond markets, once the bundles have been insured by Fannie Mae and Freddie Mac, which are backed by the government.

But the lenders continue to act as servicers on the loans. If unemployed borrowers exercise their right to forbearance — as authorised by the recently passed stimulus law — servicers still must make the principal and interest payment to bondholders. Fannie and Freddie ultimately reimburse the servicers, but at a lag, creating the potential for cash crunches.”


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