“We need to ask for a policy change because the burden with these losses is too big.”
Somebody is going to pay for losses on mortgages of homes that were destroyed by Hurricanes Harvey and Irma. It’s a just a question of who.
The taxpayer is on the hook, along with some investors. But then there are the servicers of mortgages guaranteed by the Government National Mortgage Association, for short Ginnie Mae. The largest of them is Wells Fargo, but they mostly include smaller non-banks such as PennyMac and Quicken Loans. The amounts could be large. And now they’re asking for a bailout of sorts.
In total, 4.3 million properties with nearly $700 billion in outstanding mortgage balances are located in FEMA-designated disaster areas in Texas and Florida, according to a preliminary estimate by Black Knight Financial Services:
- Disaster areas of Hurricane Harvey: 1.18 million mortgaged properties with $179 billion in unpaid mortgages.
- Disaster areas of Hurricane Irma: 3.14 million mortgaged properties with $517 billion in unpaid mortgages.
Many of these homes survived mostly unscathed. So the mortgage balances of homes that have been severely damaged or destroyed remain uncertain but are significant.
And who picks up the losses on these mortgages?
- Federal flood insurance for insured homes, but payouts are capped. Taxpayers will bail out the insurance program.
- Investors in private mortgage-backed securities (MBS) backed by mortgages that are not guaranteed by the government. Losses on those mortgages flow through to investors.
- Banks take the losses on any mortgages they hold on their books and that are not guaranteed by the government.
- Government Sponsored Enterprises (GSE), such as Fannie Mae and Freddie Mac, will be hit with losses on mortgages they guaranteed, packaged into MBS, and sold to investors. Some of the losses will be borne by private-sector investors via risk-transfer securities. The remaining losses will be borne by taxpayers.
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