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PennyMac Announces They Won't Buy Forbearance Loans


[Updated: Apr 14, 2020] Apr 14, 2020 by Liz Brumer
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On April 3, 2020, PennyMac Financial Services (NYSE: PFSI) announced that starting immediately, they will not purchase loans that are in forbearance or "for which forbearance has been requested" and that any loan receiving a forbearance request within 15 days of purchase could result in a repurchase by the seller.

PennyMac is a residential mortgage company that originates mortgages and services over $368 billion in loans nationwide. As of 2019, they play an important role in keeping banks liquid through the secondary mortgage market. This announcement brings heightened attention to servicers, lenders, and financial institutions' already high liquidity concerns.

How PennyMac's announcement impacts the financial markets

Banks require liquidity to pay short-term accounts and business debts. Most financial institutions stay liquid by keeping a set amount of cash in reserves and by selling assets, like government bonds, on the repurchase agreement market (repo market) or selling mortgage-backed securities on the secondary mortgage market.

The more liquidity a bank has, the more they can loan and help propel the growth of the economy. When liquidity is low, banks increase lending requirements, raise interest rates, or reduce the number of loans they create, restricting the economy. If a bank's liquidity is too low because they are short on cash or unable to sell assets, the bank will fail altogether.

That's why it's crucial that lenders and financial institutions buy and sell assets frequently in order for liquidity to remain high. PennyMac's announcement greatly reduces the number of loans that qualify for purchase. While they are currently one of the only lenders to announce this new policy, if others follow suit, it could further strain resources by requiring continued federal support in the purchasing of mortgage-backed securities by government-sponsored entities (GSEs) like Fannie Mae, Freddie Mac, or Ginnie Mae.

The Fed recently lowered banks' reserve ratio to zero in a flash response to the COVID-19 epidemic, and reducing leverage ratios to help reduce the banks' liquidity burden in today's economy has been discussed.

PennyMac's announcement will not break the secondary mortgage market, but it will impact it. In the coming months, as forbearance and default rates are expected to increase, it's likely we'll see other lenders implement similar or other policies to help with liquidity concerns, like JPMorgan Chase's (NYSE: JPM) recent announcement to amend their underwriting criteria for new loans.

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Liz Brumer-Smith has no position in any of the stocks mentioned. Bank CD rates has no position in any of the stocks mentioned. Bank CD rates has a disclosure policy.