The government's plan to ease the burden of mortgage debt is doing nothing but putting off an impending wave of defaults.
Coronavirus has created the sharpest drop-off in employment rates the U.S. has ever seen. Those job losses are now translating into a shocking rate of unpaid mortgages that are about to come crashing down.
Under the federal government’s coronavirus relief package, homeowners can put off their mortgage payments for up to three months. Data from the Mortgage Bankers Association show that the number of people taking advantage of the program is growing at an alarming rate.
In just a month, the percentage of loans in forbearance went from 0.25% to 2.66%. The forbearance program is intended to help Americans make ends meet as COVID-19 puts the entire economy on pause. But some parts of the economy aren’t on pause—they’re on an indefinite vacation.
That’s because even if coronavirus outbreaks are contained in the coming weeks, the public will likely carry on with social distancing measures. Ex-FDA commissioner Scott Gottlieb said the lasting fallout from coronavirus will cripple a wide range of industries from aviation to hospitality.
That means the layoffs that have ripped through the labor force aren’t temporary—those people will probably remain unemployed once lockdown measures have been lifted. The government’s forbearance program allows them to postpone their mortgage payments, but not indefinitely.
As banks across the country roll out their mortgage deferment schemes, it has become painfully clear that the government’s plan to ease the pain is simply a delay tactic. Instead of seeing a steady uptick in mortgage defaults over the next few months, mortgage servicers are going to be dealing with a tidal wave of unpaid loans.
Americans are currently sitting atop $16 trillion worth of mortgage debt, The MBA data suggests that $416 billion of that has been pushed off into a crippling lump sum payment due in July.
Depending on who backs a particular mortgage, the forbearance scheme could require consumers to repay the three months worth of missed payments as a lump sum.
According to USA Today, mortgages backed by Fannie Mae, Freddie Mac and the Federal Housing Administration and the Department of Veterans Affairs require a lump sum for the deferred payments.
According to MBA, 3.45% of those types of loans went into forbearance as of April 1.
Realistically, it’s going to be impossible for the majority of Americans taking part in the program to repay three months worth of mortgage payments. Those who are unemployed will have no income and no job prospects for the majority of their mortgage holiday. Many are mom-and-pop landlords who will be sitting on multiple highly-leveraged properties that aren’t bringing in any income.
That’s going to be a disaster for mortgage servicers who simply don’t have the capital to brace against such a huge volume of defaults. Quicken CEO Jay Farner believes six months is the longest they can go before liquidity becomes an issue:
If a large percentage of the servicing book — let’s say 20-30% of clients you take care of — don’t have the ability to make a payment for six months, most servicers will not have the capital needed to cover those payments
Another issue is that the layoffs disproportionately impact low-income households. As of mid-March, roughly 25% of households making under $50,000 per year had seen work start to evaporate. As more businesses shift to working from home, service and retail jobs are cut because they can’t be done remotely.
Those households are not only the most likely to seek mortgage relief, but they’re also the most likely to have lost their jobs causing them to default when their payments eventually come due.
That’s going to be a costly debt bubble. Bloomberg data show that Ginnie Mae guaranteed $583 billion worth of mortgages to that demographic in just the past two years. MBA data show that 4.25% of Ginnie Mae’s loans have gone into forbearance—that’s a $25 billion debt bomb waiting to explode.
This doomsday scenario assumes the number of forbearances doesn’t continue rising. But Mark Zandi of Moody’s is expect those figures to go up exponentially. He sees as many as 30% of homeowners defaulting this year, which translates into as much as $4.8 trillion in deferred mortgage debt.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.
Last modified: September 23, 2020 1:48 PM