Wells Fargo bought $ 14 billion in delinquent government guaranteed mortgages this month, leading the peloton among service providers starting to feel the toll from the coronavirus pandemic.

The banking giant was among firms that bought about $ 20 billion in total loans from investors over 90 days past due, according to data from Ginnie Mae’s investment pools.

The surge in buyouts – required for managers of delinquent loans guaranteed by Ginnie – is one of the first real signs of how the pandemic is hitting banks’ loan books. While cash-strapped mortgage borrowers may have benefited from government-sanctioned forbearance plans, Ginnie’s rules do not distinguish between such plans and missed payments. Repairers must always advance capital and interest to investors.

Analysts speculated that Wells was probably proactive in offering forbearance plans to distressed borrowers when the pandemic struck in March, at a time when regulators were urging banks to help borrowers who had lost their jobs or were on leave.

“Wells was cautious and put more people into forbearance programs in April than other service providers, on average,” said Scott Buchta, head of fixed income strategy at Brean Capital. “When loans become delinquent, it is cheaper for Wells to purchase the loans than to advance principal and interest and pay investors a 4% coupon when the cost of their funds is lower. “

Analysts speculated that Wells Fargo was probably proactive in offering forbearance plans to distressed borrowers when the pandemic struck in March, at a time when regulators were urging banks to help borrowers who had lost their jobs. or were on leave.

Bloomberg News

US Bank bought Ginnie’s second-largest total of delinquent loans from investors, $ 3.1 billion, followed by Carrington Mortgage Services, a California-based non-bank lender and manager, which bought $ 800 million in loans. suffering from Ginnie.

Tom Goyda, a spokesperson for Wells, confirmed the amount of the bank’s $ 14 billion buyout. He said under accounting rules, loans from Ginnie Mae pools must be consolidated into a bank’s balance sheet once the loan is more than 90 days past due, regardless of the circumstances.

“In the normal course of business, Wells Fargo regularly purchases government insured loans … that are over 90 days past due on Ginnie Mae pools to manage balance sheet impacts and reduce expenses. “said Goyda. “In June and July, the number of loans we purchased from the Ginnie Mae pools increased significantly mainly due to loans in COVID-related forbearances.”

Other banks that made large purchases of 90-day past due loans include Truist Financial, formerly BB&T Bank, with $ 772 million in purchases; JPMorgan Chase, with $ 545 million; and MidFirst Bank in Oklahoma City, with $ 341 million in purchases.

Some analysts suggest that the buybacks are not indicative of long-term delinquencies, as many borrowers who applied for forbearance plans in March will end up being up-to-date on their mortgages even if they haven’t made their payments in due time. April, May and June. Congressional relief allows borrowers to defer mortgage payments for up to one year and extend the terms of a loan to avoid foreclosure.

Wells is the third largest provider of loans guaranteed by the Federal Housing Administration, the Department of Veterans Affairs, and the USDA Rural Development Loan Program of the United States Department of Agriculture. Ginnie Mae oversees the securitization of FHA, VA, and USDA loans ensuring that principal and interest payments are made to bondholders on a timely basis.

Wells has bought back more than 7% of its entire service book, Buchta said.

“It’s a large number and some investors have been smoked, so it had a significant impact on the market as a whole,” he said. “It was not a happy event for investors. It certainly caused a lot of capital loss for investors in Wells Fargo securities.”

But other observers said Wells’ one-time purchase was likely a cheaper option for the bank than continuing to collect missed payments for investors.

“Wells was probably losing a ton of money because the loans were in Ginnie Mae’s pools,” said Ted Tozer, principal investigator at the Milken Institute and former president of Ginnie. “It’s a hangover of delinquency.”

At the end of each month, Ginnie releases data on the loan level of mortgage agents that shows recent activity and the number of delinquent loans. The data provides information to mortgage-backed securities investors about loans that have been repaid or are 30, 60 or 90 days past due.

According to the Mortgage Bankers Association, approximately 4.2 million homeowners are on a forbearance plan. About 12% of Ginnie loans were in forbearance on July 8, compared to about 6% of loans guaranteed by Fannie Mae and Freddie Mac.

Only 15% of banks and credit unions currently grant FHA loans. Many banks withdrew from the FHA program after the 2008 financial crisis because of the risk of being sued by the government for violating the False Claims Act. Under the Trump administration, the FHA was trying to seduce the banks back to the program.

Some mortgage experts believe the defaults resulting from the coronavirus crisis are short-lived, noting that homeowners went into forbearance in part because Congress gave them the green light under the Aid Act, coronavirus relief and economic security.

“These were all performing loans before the pandemic and borrowers opted out due to the CARES Act,” said Rick Sharga, president and CEO of CJ Patrick Company, a financial consulting firm. real estate. “They weren’t previously nonperforming loans. A large number will either start making payments again or be reinstated and a small number will get loan mods or extended forbearance. “

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