Outside the Box: How coronavirus is already threatening the housing market

As the coronavirus pandemic threatens financial markets and sends the U.S. economy into a potential recession, those of us who lead mortgage firms must take swift action to prepare for the worst. The last time the financial markets suffered such a precipitous drop was during the 2008 Great Financial Crisis.

I was CEO of CitiMortgage during and after that crisis and saw firsthand how the housing market became paralyzed. I’m now CEO of the nation’s third-largest housing specialty lender (HSL), and I’m applying some of the lessons that I learned from the last crisis. Here is what we in the mortgage industry should consider doing immediately:

1. Increase liquidity:. More than 50% of U.S. mortgage originations and 45% of servicing are provided by “non-banks,” or HSLs.

I wrote about this potential threat a year ago, and I’d like to re-share how the financing works: “Non-banks [HSLs] originate loans and then sell them to other entities such as Freddie Mac and Fannie Mae, which pay non-banks an ongoing fee to service the loan. The lifetime value of this fee is an asset known as a mortgage-servicing right or MSR. Non-banks use MSRs as collateral, so that they can borrow money from banks to use as working capital.”