An estimated 15 million households could miss future payments if the economy continues to be closed off.
No matter how many rent or mortgage payments are foregone due to the coronavirus, those missing payments won’t go away quickly. They will have to be paid back at some point, and when that point comes – it will put a hefty strain on consumer’s finances.
CEO of RXR Reality, Scott Rechler, explains that we are watching this ensuing housing crisis unfold in slow motion across the real estate sector:
We know the bad part is coming, but we don’t know how long it will last or how resilient we’ll be.
Not only are homeowners and renters unable to make rent, but restaurants, retailers, and hotels are feeling the pressure, too . Nearly every state has issued the closing of non-essential businesses. No customers mean no profit – which makes it a challenge to meet the rent.
The effects of missed payments will ripple long after the fact. Look no further than the 2008 financial crisis for evidence of this.
In 2008, people bought homes they couldn’t afford, and most of these purchases were on borrowed money – mortgages. From there, those mortgages were turned into securities and sold off as investments.
Once the bubble burst and people couldn’t afford to make their mortgage payments, the value of those securities fell drastically. Once the banks couldn’t sell the mortgage-backed securities, they ran out of money and either sank or got bailed out .
In the last two weeks of March, around 2,600 commercial mortgage-backed securities borrowers reached out to banks looking for $500 billion in relief measures.
Bear in mind, that was for just the last half of March. If people cease paying rent and landlords can’t pay their own obligations, they will stop paying their interest and principal on their mortgages. From there, banks would start seeing defaults and tremendous loss of money.
Once the economy starts to show warning signs, it can cause a chain reaction as values of assets plummet. Banks would also experience huge margins of loss when they so desperately only need growth.
Who would be left holding the bag? The federal government and their current propensity for bailouts, à la 2008.