The 2006-2009 financial crisis was fueled by Washington’s desire to guarantee everyone a home and the Federal Reserve taking the advice of Paul Krugman to replace the dot-com bubble with a housing one. The U.S. central bank, the federal government, and the banks have facilitated another real estate fiasco, returning to their old ways of putrid underwriting standards, low interest rates, and giving anyone with a pulse a mortgage. The housing bubble 2.0 was not supposed to pop for another couple of years, but the bats had a different idea. The Coronavirus pandemic is creating horrific conditions for the industry, particularly mortgage lenders. A tidal wave of defaults, millions in forbearance, and a collapse in the lending market – a housing crisis may be the next economic problem to contend with in six months.
A Look at the Mortgage Data
Moody’s Analytics projects that as much as 30% of homeowners could stop paying their mortgages. Could this be a reality by the summer? Since the U.S. government initiated the forbearance program under the CARES Act, the data suggest that the number of homeowners missing payments is gradually climbing – and it could top the last disaster.
According to the Mortgage Bankers Association’s (MBA) Forbearance and Call Volume Survey, the percentage of loans in forbearance surged to 2.66% as of April 1, up from 0.25% on March 2. The figure is even higher among mortgages backed by the Government National Mortgage Association with 4.25%.
Mike Fratantoni, MBA’s Senior Vice President and Chief Economist, warned in a news release that the requests would soon become “unsustainable” that would apply “insurmountable cash flow constraints” for lenders, including independent mortgage banks (IMBs). Fratantoni’s concerns might be justified.
Bank of America recently confirmed that it has permitted 50,000 mortgage customers to defer payments, including loans that are not federally supported. Wells Fargo suspended purchases of jumbo loans that originate from other lenders. Billionaire investor Carl Icahn believes the nation’s commercial real estate market will crash comparable to the broader housing market debacle a decade ago – he is shorting this area of the industry.
If even a fifth of borrowers cannot execute payments for six months, lenders’ capital will rapidly erode. As a result, the industry is encouraging the federal government to extend a lifeline to the mortgage market through a lending facility. Just like consumers and businesses have to cover their obligations, servicers still need to make principal and interest payments to investors.
But lenders should not anticipate a cash-flow injection, says Mark Calabria, the head of the Federal Housing Finance Agency (FHFA), who dismissed the sector’s worries as “spin.” Treasury Secretary Steven Mnuchin and his Financial Stability Oversight task force are also waiting to see if other enacted policies will ease the liquidity crunch until additional action.
The saving grace for lenders is that fewer Americans are searching for a home. Weekly mortgage applications recently fell 33% year-over-year, but submissions to refinance a mortgage soared 144%.
Considering how fast everything has and could change, the government may alter its opinion once the madness ceases. Think of it this way: The real estate sector expected its biggest spring in years. The birds are singing, the sun is shining, and we are now discussing millions of homeowners unable to pay the mortgage. For now, it is about surviving until tomorrow.
Deferring the Inevitable
Banks and lenders are doing their part during these chaotic times by giving homeowners and businesses reprieves. But the temporary relief is not a payment holiday – it is a deferral. By delaying payments for 180 days, borrowers and renters are kicking the can down the road and will need to eventually come up with a sizeable payment that might be nearly impossible to make.
If everything does return to normal by July, millions of people and small companies will require time to catch up. It would be difficult to make a $10,000 payment with interest right after the COVID-19 pandemic subsides. Experts purport that Washington needs to prevent foreclosures for as long as possible and by any means necessary. Many people are hoping for a financial lifeline on the other side of the lockdown.
Laura Habberstad, a bar manager in the nation’s capital, shared the sentiments of a lot of people in an interview with Bloomberg:
“I don’t know how I’m going to pay my mortgage and my condo dues and still be able to feed myself. I just hope that, once things open up again, we who are impacted by COVID-19 are given consideration and sufficient time to bring all payments current without penalty and in a manner that does not bring us even more financial hardship.”
It is unclear what other measures policymakers could employ besides throwing even more money at the problem. Politicians are discussing a fourth Coronavirus relief package to the tune of $1 trillion that will permanently strain America’s finances. Considering the Swamp has broken the bank (again) for sustenance purposes, it's not outside the realm of possibility that lawmakers will spend more in a post-Coronavirus world. Perhaps this will trigger a flirtation for a universal basic income (UBI).
What’s the Solution?
Italy is suspending mortgages. Canada is pausing payments on 10% of mortgages. Britons may receive a break from payments. China is trying to shore up the banks. What will America do? Total mortgage debt is about $16 trillion – and growing – so it is not a small pocket of the economy. Many borrowers would prefer a holiday from their obligations, but the bill needs to be paid somehow. Whether it is in the shape of higher taxes or the Fed bailing everyone out, the cure might only be a band-aid for greater anguish until the real crisis infiltrates the U.S. market. No treatment will stop the hemorrhaging.
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Read more from Andrew Moran.
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