America will choose a new President and other leaders in the coming week and whoever is elected will face the worst economic situation since the 1930s. There are no easy or obvious answers for the many issues that must be confronted, but whether Trump or Biden is the winner either will face substantial problems with the housing sector.
“The housing sector is enormous,” said Rick Sharga, Executive Vice President with RealtyTrac, a leading source of investor leads and real estate data. “According to the Congressional Research Service the housing market represented about 15% of the entire gross domestic product in 2018.
“We now have a situation,” he continued, “where millions of people have missed rent or mortgage payments and yet mortgage rates are low and home prices are strong. There’s little likelihood of the mass foreclosures we saw with the mortgage meltdown. The biggest challenge going forward is how to help tenants and homeowners who have missed payments. If we do that we can also help landlords and lenders and make them whole.”
The New Economy
Like a tornado going across a small town, the COVID-19 pandemic has torn through the country with a speed and strength not otherwise seen in our lifetimes. Households nationwide have been impacted by the virus and the terrible toll it has taken. We grieve for those who have suffered, the loss of life, and the harsh consequences faced by millions of our neighbors.
Recovery will not be easy. There are sure to be debates in Washington regarding what steps to take, but a good place to start is likely to be with the six million people the Mortgage Bankers Association (MBA) says have missed mortgage or rental payments.
Figures published by the MBA in mid-October show that 3.37 million homeowners (7.1%) had missed their mortgage payment.
At first this sounds like a frightful number, a suggestion of mass foreclosures and property value declines to come. But a closer examination suggests a different outcome, one with few foreclosures and relatively little financial distress.
Most of the missed mortgage payments are related to foreclosure moratoriums at the federal, state, and local levels. Borrowers impacted by the virus can petition lenders for a 180-day forbearance period and then a second 180-day term. Both federal and state regulators announced in March that they would provide “needed regulatory flexibility to enable mortgage servicers to work with struggling consumers.”
It’s not just that mortgage borrowers can miss payments, they can do so without damaging their credit. As the Consumer Financial Protection Bureau points out, “your servicer or creditor is required to report your account as current.”
Perhaps most importantly, the federal forbearance program — which applies to FHA, VA, and USDA financing as well as mortgages that involve Fannie Mae and Freddie Mac — has an out. Once forbearance ends borrowers have three basic options.
- They can enter into a payment program and gradually pay back lenders.
- They can bring their loan current with a lump sum, though this is not an option lenders can demand,
- Or, borrowers can add unpaid months to the end of the loan term. According to the MBA, more than 70% of all borrowers are choosing the loan extension option as they exit forbearance plans. In effect – and assuming values hold up — the money they owe will be repaid when the property is refinanced or sold.
Owners, of course, also have another option. Large numbers can sell the property, pay off the loan, and avoid foreclosure. In most areas home prices are up and many owners — but not all — have substantial equity. Figures from ATTOM Data Solutions show that in the second quarter 15.2 million homes were equity rich (mortgage debt was less than half the value of the property). The same report found that 3.4 million homes were seriously underwater (mortgage balances equaled at least 25% more than the property’s fair market value).
In September, said the MBA, 2.82 million renters (8.5%) “missed, delayed, or made a reduced payment.”
Renters have protection from eviction, but not full protection. As the CFPB explains, eviction is allowed if “you are being evicted for reasons other than nonpayment of rent or fees and charges related to nonpayment of rent. For instance, your landlord can still evict you for breaking other agreements in your lease.”
The nationwide eviction moratorium was issued not by financial or real estate regulators but by the Centers for Disease Control and Prevention (CDC).
“This Order,” said the CDC, “is a temporary eviction moratorium to prevent the further spread of COVID-19. This Order does not relieve any individual of any obligation to pay rent, make a housing payment, or comply with any other obligation that the individual may have under a tenancy, lease, or similar contract. Nothing in this Order precludes the charging or collecting of fees, penalties, or interest as a result of the failure to pay rent or other housing payment on a timely basis, under the terms of any applicable contract.”
The CDC order effectively halts most evictions but unlike the foreclosure moratorium does not offer an exit strategy. Terms such as payment plan, lump sum, credit, and defer do not appear in the CDC order.
“Be prepared to pay housing costs eventually or find financial support to help,” the Stanford Legal Design Lab tells tenants. “Even if you may have protections to not pay rent or utilities during the emergency, you may have to pay it all afterwards. You can reach out for financial assistance for housing costs. You can also work with your landlord to arrange a reasonable payment plan.”
Where Are We Going?
And what if a tenant doesn’t find financial support, assistance, or a “reasonable” payment plan? Or a job? This is not just a problem for tenants it also impacts landlords, lenders, and property tax collectors. A landlord’s obligations to maintain the property as well as pay taxes and insurance continue whether or not the rent is paid.
The outlines regarding what may happen next can already be seen. NBC reported in late October that “from early September to Oct. 17, despite the CDC eviction ban, almost 10,000 eviction actions have been filed in 23 counties in Arizona, Florida, Georgia, Tennessee and Texas by large corporate landlords.”
Nearly 10,000 evictions in just five states. In 23 counties among five states with a total of 578 counties. By large landlords, not all landlords. During a nationwide eviction moratorium.
What happens when the moratorium ends?
“There’s a need to help both tenants and landlords,” said Sharga, “regardless of who gets sworn in on the Capitol steps. While mass foreclosures are unlikely because of the way relief has been structured, the potential for mass evictions is a looming problem that will add significantly to the Nation’s distress if it’s not resolved.”