Another installment in our series:
These Economic Times: The Great Pandemic of 2020.
As part of our ongoing series on the economic fallout from the COVID-19 Pandemic, we focus today on homeowners and the problem with mortgages.
Most banks including Fannie and Freddie backed loans are offering forbearances for those hit by the pandemic and have been sheltering at home these past two months. During that time, a record number of homeowners have been taking advantage of these programs offering some solace during the raging economic storm.
As of this week approximately 4,000,000 or more homeowners are not making their monthly mortgage payments. This represents slightly under 8% of all active mortgages in the United States, or approximately almost $900 Billion of unpaid principal. (you may want to re-read that) More specifically these numbers include more than 5% of all loans backed by Fannie Mae and Freddie Mac. They also include over 10% of all FHA or VA loans. These are staggering numbers no matter how you look at them, as they are a lot higher than banks and the government had originally anticipated.
Popular news is fond of reporting that new forbearance filings have declined in the past week, but other pundits feel this is just the tip of the iceberg when a different reality sets in as the economy does not immediately sprint back to where it was. The other wild card is that many banks are asking borrowers to forbear on a monthly basis and the numbers for May requests have not yet been compiled. Market analysts have predicted a similar number for May since nothing has really changed for these homeowners.
According to the legislation passed by the government in the COVID-19 CARES ACT, mortgage holders can ask for forbearance for a period of 90 days to start and then can extend that up to a year. This structure is a lot like the car, student debt and other loans that will tack the forbearance time onto the back of the loan or in terms of real estate backed loans, some will enter modification.
The unknown factor here is how this will affect the sale of real estate as not only will prices decline due to current economic conditions and people being unemployed, but purchasers may make different decisions now based on changed economic factors. A loan that had fifteen years left on it, may now have an additional year or two, which may deter sellers from selling in the near term. Other fees and interest accruals may affect the actual payoff amounts that as well could factor into those decisions.
Additionally, the real question is what is going to happen to the value of the bonds that are made up of RMBS (Residential Mortgage Backed Securities) loans when mortgages are securitized. The servicers of those loans still have to pay the bond holders their strip or coupon payments and principal so that the bonds do not default as well. That means under the current numbers above, approximately $4 billion or more has to be paid to holders of the bonds monthly by servicers, while they are not receiving the monthly payments on these loans from the actual borrower. There are also the additional loans that are in a portfolio of such loans or held privately. Some economists estimate those to be costing portfolio holders almost $2 billion a month in carrying charges and debt payments while they are not being paid.
It is obvious that these loans will eventually need to be modified in some way in order to not have them all default. The difference here is that this is a government mandated shut down of the economy and not the mortgage crisis during the Great Recession. This situation was brought on by the government and the current pandemic and not cooked up by or a fault of the banks that did these loans. Unfortunately, though the end result may be similar.
It remains to be seen how the banks and the federal government will deal with such situations and only time will tell what additional policies may be legislated or enacted to help banks and borrowers deal with the situation everyone finds themselves in.
One thing is for certain, it is possible for all of these loans to default in their entirety if the borrowers are not capable of returning to the labor force. Or if the economy does not come back in a short enough time frame to stem off a domino like effect of defaults and foreclosures.
Stay tuned and Stay safe.