There’s Still Time to Stop a Looming Housing Crisis
Millions of U.S. homeowners have been struggling to keep up with their mortgage payments over the last several months due to the economic wreckage from COVID-19 pandemic. As of June 14, 4.2 million homeowners were in forbearance plans, according to data released in mid-June by the Mortgage Bankers Association. About 8.6% of all active mortgages were in forbearance as of the final week in June, according to a report by mortgage data tracker Black Knight.
The high rates of missed mortgage payments — coupled with the expected onslaught of evictions as state-initiated rental protections come to an end — could signal a rough turn for the housing market.
While opinions on the long-term outlook of the housing market are mixed, some experts are raising concerns that our country could be headed for another mortgage crisis. If this happens, it will be bad news for homeowners and mortgage lenders alike. Keep tabs on national mortgage rates and trends to see how the COVID-19 crisis is affecting the mortgage space.
What’s causing the issue?
There are a number of reasons we’re at risk of a new mortgage crisis. A record number of homeowners missed mortgage payments in May, which is one of the biggest indicators that we could be headed for some serious issues. The new uptick in COVID-19 cases isn’t helping much, either — and neither are the unstable job markets that have unemployed people struggling to find new sources of income.
There’s also the issue of the upcoming loss of federal enhancements to state unemployment benefits, which gave a weekly payment of $600 to people collecting unemployment. These payments are set to stop at the end of July, and the loss of extra income could spell disaster for homeowners who desperately need that federal enhancement.
“The threat that forbearance will transition to foreclosure has regained power because the number of COVID-19 infections is increasing and the CARES Act unemployment insurance benefits will expire at the end of July,” economists with the Federal Reserve Bank of Atlanta said in a report from early July.
Those enhanced unemployment benefits have kept forbearance rates lower than the oft-forecasted of 20% to 30% that was expected, according to the report, so the loss of the benefits could be devastating to homeowners who’ve relied on those benefits to make their mortgage payments.
There’s still the chance that lawmakers could opt to expand those federal unemployment enhancements, but if they end in July, it could cause a swift uptick in missed mortgage payments — and spell out real trouble for lenders.
What do we have to lose?
Well, the short answer is “a lot.” If the missed payments increase and turn into foreclosures, we could be facing a new nationwide mortgage crisis. Most importantly, homeowners will are at risk of losing their homes and investments, but lenders will sustain serious hits as people default on their loans, too.
Something similar occurred back in 2008-2009 when the housing and lending markets collapsed during the subprime mortgage crisis. At that time, a slew of mortgage loans were being offered to unqualified buyers to help satisfy the demand for mortgage-backed securities. In many cases, these underqualified buyers couldn’t afford the homes they were buying, which led to a high percentage of mortgage loan defaults.
Mass foreclosures became the norm, and banks took serious hits as homeowners defaulted on their loans left and right. Home prices dropped, the housing bubble collapsed, and people were left devastated, with homes they couldn’t afford or weren’t worth what they’d paid for them.
Homeowners lost their homes, and banks that were heavily invested in mortgage-backed securities lost massive amounts of money, too. It’s estimated that the market lost nearly $8 trillion from late 2007 to 2009, and major bailouts were provided by the federal government to lenders to try and protect the entire economy from crashing.
At one point, the average loss severity of subprime loans — which is the amount lost as a ratio of the loan amount — was 73%. It wasn’t uncommon to see losses greater than 100% during that time, either. The government invested nearly $700 billion to try and save the banks and lenders that were heavily invested in mortgage-backed securities.
In short, it was incredibly damaging to the economy, and experts are warning that there’s a real risk of a similar situation occurring soon if changes aren’t made.
If state and local governments don’t step in, there will be a “tsunami of evictions and a spike in homelessness” nationwide, that will “devastate” not just individuals and their communities, but the economy broadly, Diane Yentel, president and CEO of the National Low Income Housing Coalition, told CNBC Make It recently.
If that tsunami happens, lenders likely won’t be able to recuperate most of the funds dispersed to homebuyers, which could put us on a path to yet another mortgage crisis.
“If precedent is anything to go by, in many cases it’s unlikely that the mortgage lenders will ever see much of the money they’ve lent,” a recent article by the Harvard Business Journal noted.
Something needs to be done to quickly temper the issue and avoid a recurrence of 2008. But what?
How can we stop it?
The only real answer to tempering the looming housing crisis is government intervention. Some temporary federal protections have been put into place for homeowners as part of the CARES Act, and dozens of cities and states have passed moratoriums on evictions and foreclosures.
These measures have worked to keep people housed temporarily, but most of these protections are slated to end in the upcoming months. Ultimately, this crisis requires a large-scale federal government response, according to experts.
Federal Reserve Chairman Jerome Powell recently warned that additional relief measures are needed from Congress to avoid “long-term damage” to the economy, a sentiment that has been echoed by financial experts and lawmakers across party lines.
But, while necessary, it’s unknown whether a significant federal response will actually happen. Many lawmakers have called on the U.S. Senate in recent weeks to pass additional federal COVID-19 relief legislation via “The Heroes Act.” If passed, this act would provide almost $200 billion in additional funding for housing and homelessness programs to help communities address the needs of low-income renters, homeowners and people experiencing homelessness.
It would also expand eligibility for the Paycheck Protection Program and extend eligibility for paid sick leave and paid family and medical leave under the Families First Coronavirus Response Act, among other things. But, as of July 16, the Senate was still on vacation and no decisions had been made about the expanded relief package. No firm date has been given for a vote on the act.
It looks like that fight could be an uphill battle either way, though. Massachusetts Senator Ed Markey recently described the push for another stimulus package as the “epic battle” of his career, with lawmakers and the Trump administration at odds over the proposed relief package.
Majority Leader Mitch McConnell has dismissed the package as a “liberal wishlist,” stating that “[W]hat you’ve seen in the House … is not something designed to deal with reality, but designed to deal with aspirations. This is not a time for aspirational legislation, this is a time for practical response to the coronavirus pandemic. And so, we’re going to insist on doing narrowly targeted legislation, if and when we do legislate again, and we may well, that addresses the problems. The needs, and not the aspirations of the Democratic majority in the House.”
Plenty of other opposition regarding the proposed act has been made clear as well, leaving it unclear as to whether the act will make it past the Senate.
Until a coordinated federal response is in place, cash-strapped homeowners will have to rely on state or local emergency relief programs to get through. If you’re in need of immediate help, you can check the website of your state government or state courts to find out what’s available to you.