fedfin

As signalled earlier this week by Secretary Mnuchin, the Fed opened its windows still wider early this morning, launching facilities it says will add as much as $2.3 trillion of liquidity for what it describes as “Main Street” businesses, state and local governments, and a PPP secondary market.  It has also significantly revised its corporate-loan and TALF facilities.  This report describes each facility in detail, noting changes to the Fed’s initial design (see Client Report COVID6) and the sharp increase in Treasury backstops reflecting the $454 billion allocated for this in the CARES Act (See FSM Report RESCUE72).  Doubtless reflecting the PPP’s troubled launch, the Fed notes in its Main Street program that it may be altered over time, seeking comment on how to do so until April 16.

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In response to the CARES Act and in consultation with state regulators, the banking agencies and CFPB have expanded on forbearance and related guidance issued early in the course of the COVID crisis.  This statement makes it clear that forbearance is unlikely to incur supervisory censure absent high-risk or predatory action.  Capital protection is also afforded loan modifications and related actions not directly covered by express capital neutralization.

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As we have noted, one option Treasury and the Fed have readily at hand to deal with mortgage-servicer risk is not only the new liquidity window so desperately sought by the sector, but also Dodd-Frank’s orderly liquidation authority (OLA).  This allows federal intervention and resolution of systemic nonbank financial institutions.

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Building on the capital “neutralization” previously enacted via an inter-agency IFR, the Federal Reserve has also waived the supplemental leverage ratio (SLR) for large BHCs during the national emergency.  GSIBs come under the enhanced SLR (eSLR) but are similarly provided temporary relief.  GSIBs are subject to the eSLR’s higher ratios (e.g., five percent at the BHC level), but the ratio from which this is calculated reflects the new, less-stringent denominator applicable under the SLR.

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On Wednesday, the Fed rushed out another crisis-propelled interim rule, this one temporarily retracting the supplementary leverage ratio (SLR) for Treasuries and central-bank reserves.  It’s unbecoming to say I told them so, but politeness fades in the face of fury about the acute harm foreseeable mistakes are doing to millions of vulnerable Americans and the fragile financial system on which they depend.  Federal Financial Analytics’ studies in 2015 and 2016 laid out how acute stress scenarios would flood banks with flight-to-safety deposits that banks would be unable to accept due to the SLR.  In 2016, we also laid out unintended consequences for systemic resilience and equality stemming from the reverberations between post-crisis, bank-centric monetary and regulatory policy under stress.  Indeed, our first look at post-crisis rules in 2011 saw more than a bit of this coming.  A decade ago, I didn’t understand how unequal America was soon to become due in good part to post-crisis policy, but this too was foreseeable, as was the inexorable nexus between inequality and financial crises.  All of this work relies on a simple rule I learned decades ago at MIT:  the more highly-constructed the theorem, the more likely it is to be wrong.  With this rule in mind, what can we expect from the trillions now flowing from the Treasury’s and Fed’s desperate efforts to rewrite the rules in which they had such unbounded confidence just six weeks ago?

Anything I say now is only a guess because nothing can be …

Although all the new windows in the CARES Act do not expressly provide support for troubled nonbanks such as mortgage servicers, the law does give the OCC authority it is likely to use to allow banks to suspend at least some loan limits to nonbank financial institutions for the duration of the crisis.

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As clients will see in our in-depth report on the CARES Act’s mortgage provisions, we simply don’t share the Administration’s desperate hopes that only the extra-worthy will apply for relief.  Indeed, even if we shared them, the proliferation of YouTube videos instructing borrowers to run to the phones tells us otherwise.  The very generous forbearance HUD has also announced reinforces our forecast of a mortgage-forbearance deluge, adding to it a second wave of partial forgiveness once the crisis ebbs and loan-mod negotiations begin.  It’s too soon to tell whether all this ends up in a nationalized U.S. mortgage system, but we think GSE privatization has gotten even more complicated than before.

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The CARES Act includes mortgage-relief language allowing any American with a “federal” mortgage to defer payment for as long as one year following an assertion of adverse COVID financial impact.  Millions will surely do so, flooding servicers with calls few have the capacity to handle in the midst also of handling all the refinancings and new loans straining capacity before the crisis.  The advances servicers must make to investors will drain scant liquidity and then minimal capital resources at the nonbanks that have become the backbone of federal mortgages in recent years despite a short-term lifeline from Ginnie Mae.

The full report is available to retainer clients. To find out how you can sign up for the service, click here.…