Carol Galante: Lessons from the Last Crisis

Former FHA commissioner Carol Galante talked with Eric Souza of Mortgage Media about the impact of COVID-19 on the housing industry. Their discussion focused on her recent post titled Lessons from the Great Recession for Today, the Federal Reserve’s response to the current crisis, and more. Galante served in the Obama administration for just over five years. She is the I. Donald Terner Distinguished Professor in Affordable Housing and Urban Policy and the faculty director of the Terner Center for Housing Innovation at UC Berkeley.

Here are some of Galante’s comments from that discussion. Listen to the full conversation below.

Carol Galante

The Current Situation

The big issue here is you can suspend both mortgage payments and delay the requirement to pay rent, or delay the requirement for evicting someone who can’t pay rent because of the severe immediate drop in income. I think the challenge, particularly for renters, is that they tend to be lower wage workers to start with and have lower incomes, and therefore just delaying the payments is not going to solve the problem in whatever, three months, or two months, however long that period of time lasts, they’re not then going to have the money to pay up at that point in time.

So what happens then? This is the kind of spiral that we got into in the last financial crisis. And we ended up with landlords and owners of the rental properties, or owners of their own homes stuck in a place where they can’t make the payments and they don’t have a way to make it up. A stimulus package needs to include emergency housing payment assistance, and I don’t see that.

Assistance and Relief

We are doing some analysis to try to get to an answer of what this could cost. The issue is, of course, how long will this last and so how for how long do you need that emergency assistance? Then also the parameters that you would set for who would be eligible to get that assistance? Not everyone needs that assistance. But those payments are needed, not just so that the family can survive this interim period, but so that the lenders and owners of these properties can also meet their obligations. It will cost a lot of money, but unless we spend that money today, I think we just start to dig ourselves into a bigger hole four or five months from now.

Her Solution

I would be more bold in spending stimulus money now to keep people in their homes and to keep the owners of those properties, be they the actual homeowner, or be they a renter in a investment-owned property, to keep those properties stable. If you don’t keep them stable today and invest in it today, you’re going to see maybe and depending on how long this lasts, some of the kinds of challenges we saw in neighborhoods in the last financial crisis. If you provide this emergency aid today, we won’t be in a situation where we were with the Hardest Hit Funds and Neighborhood Stabilization Program. But to the extent that in that longer term recovery, you do need more assistance to property owners and to properties in neighborhoods.

Doing Things Differently

I would not have so many of the rules and regulations around how to spend whatever federal stimulus comes to local governments. Really, NSP for example, was tied up in a significant number of limitations on how that money could be spent. I think that really hurt the ability of governments to move quickly. I’m in favor of still having accountability, but being sure that we aren’t hamstringing local governments or mission-oriented nonprofits and keeping the regulations as minimalist as possible.

Funding

I hope we don’t get to a point where we need this kind of assistance because that will depend on the actions that we’re taking today. Should we find ourselves in this situation, we need funding to community development financial institutions for them to lend mission-oriented organizations that will purchase assets and keep them affordable over time. I don’t necessarily mean deeply affordable, but just stabilize them, as opposed to needing to make a significant investment return for their private capital off of that purchase. That means we need the funding for this type of activity to come from lower cost capital, which is either grant or low interest loans from governmental entities.

Stimulus Packages

So far, we are not seeing what I would call emergency rental assistance. We are seeing some emergency funding assistance that will enable local governments to provide more emergency shelters and to provide some temporary, short-term rental assistance to the most vulnerable. But it is not the dose of emergency assistance that we need for the vast majority of Americans who are going to be in a very difficult situation starting probably April 1st.

Special Assistance

Special assistance as part of a stimulus package could happen in a couple of ways. Community Development Block Grant, is the vehicle that is used for emergency assistance in hurricanes. Congress could allocate funding for that activity again. Local governments and state governments could target what kind of housing development is most needed, or what housing investment is most needed.

A Broader Scope

The only way to get people to understand this is drawing the example from the last time around. We kept trying to modify people’s mortgages so that they could make those back payments and it had a really limited impact at the end of the day. Many people ended up in a worse economic situation than if we had spent money upfront to just help them keep in their homes for that year or however long it would take for the economy to turn around. People need to see these parallels and reflect on what was done during the last crisis. We need to ensure we’re not going to end up in the same longer-term downward spiral.

Action Now

I would encourage homeowners or industry professionals to say to legislators that we need immediate housing aid to individuals now and that aid needs to continue for as long as people who work for small businesses, restaurants, and personal services are literally out of work. We need to be thinking about the ability for those families to pay their rent and their mortgage. All of the effort that’s happening right now for unemployment insurance and benefits is great, but it is not going to be enough assistance for people to stay afloat very long.

Content has been edited for length and grammar.

Listen to the full interview.