The Unintended Consequences of Doing Good

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By John Mauldin

The Federal Reserve is buying mortgage-backed securities with the best of intentions. But there are unintended consequences.

Last week, I had a truly horrifying phone call with good friend and real estate expert, Barry Habib. He knows the mortgage business inside and out and he’s very concerned right now.

Briefly, the Federal Reserve and other bank regulators have relaxed some rules so lenders can be more patient with people who fall behind on their loan payments. It’s called “forbearance.” I think we all agree that’s necessary under the circumstances.

The problem is, they didn’t grant forbearance to mortgage servicers. That is, the companies who collect payments, handle tax escrows, etc. They also take risk as mortgages wind through the system from origination to the investors who actually own them.

The servicer must make payments to Fannie Mae, Freddie Mac, and especially Ginnie Mae even if the mortgage is delinquent.

Normally the risk is small. Suddenly it is not.

Mortgage service providers are the fan belt of the economic engine. It is a $3 part (or, it was when I was a kid and installed them myself), but the entire engine freezes up if it breaks.

The mortgage belt has snapped, and we are weeks away from the entire housing engine collapsing.

Late last week, we learned that Treasury Secretary Steven Mnuchin is aware of this “minor issue” and is trying to decide what to do.

He needs to decide quickly.

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