One of the big lessons from the Great Recession is the importance of quickly putting in place effective measures to protect homeowners and renters from missed rent or mortgage payments because of systemic economic dislocations. Action must be swift, aid must be available to consumers and their creditors in the least complicated fashion possible, and creditors and investors must have the means to weather repayment interruptions that will stretch for months, if not years. So now is the time to act, and act with speed and focus.
Preventing mortgage delinquencies, late fees and defaults, tenant evictions and landlord hardship must be at the center of any relief package. Not to do so invites a repeat of the disastrous housing economy of 2008-2010, unnecessary pain and suffering by borrowers and creditors alike, and the lost chance to inject a much-needed stimulus to consumers right now, when they need it most.
In an encouraging development, both Fannie Mae and Freddie Mac have offered borrowers whose loans they have guaranteed 6 months’ forbearance on their mortgage payments, with the option to extend for another 6 months. Late fees will be waived and these suspensions will not be reported as negative events to credit reporting bureaus, protecting borrowers’ credit scores. Both companies have waived their standard requirement for documentation of income interruption. Relief should be provided on a consumer’s attestation of hardship because of the virus.
Forbearance must be offered for the full mortgage payment amount. In normal times forbearance plans are tailored to individual circumstances. Big mistake if continued today. The normal process of developing individualized plans would delay the process and require complicated accountings of revenue lost based on millions of individual plans. A key lesson from the foreclosure crisis is that critical aid can – and will — be lost and critical time irretrievably lost if we confront a crisis situation as business as usual, but on steroids. Servicers do not have the capacity to individualize forbearance plans, another lesson painfully learned through HAMP and HARP. Nor is there a need for them to do so – borrowers will remain liable for the foregone payments.
Such blanket relief based only on the borrower’s attestation has been criticized for its potential moral hazard – the risk that it will encourage consumers to shirk their responsibilities. First, the last crisis showed that this was not the problem it was cracked up to be – it turned out that US consumers understood the importance of paying their debts. Second, borrowers will remain liable for the entire amount of any forgone payments – this is not a “get out of the mortgage free” card. Third, we learned from the financial crisis that it is far better to act expansively and quickly to support borrowers, keep borrowers in place and pump relief into the system than to try to use a rifle-shot approach that ultimately fails to hit the mark. Fourth, the mortgages that need attention now are not like many of those that cratered in the last crisis. Thanks to the Dodd-Frank Act and CFPB rules mortgage lending is much safer and more stable now. Loans are not failing – income is failing and borrowers need relief right now.
As positive as the Fannie and Freddie steps are, their securities account only for about 46 percent of outstanding mortgage loans. A significant portion – more than 14 million loans – remain on lenders’ balance sheets or in private label securities. Consumer treatment must be uniform. Legislation enshrining the kind of forbearance ordered by Fannie and Freddie, with appropriate improvements, must be extended through other creditors, highlighting its urgency.
Will the pending emergency packages include such provisions? Proposals put forward by Senate Banking Committee Ranking Member Sen. Sherrod Brown (D-OH) would do so, but so far have not been included in the majority’s draft. The House Financial Services Committee Chairwoman Maxine Waters (D-CA) is introducing similar measures. This omission must be corrected in any final bill as soon as possible, before this omnibus relief bill is finalized.
The servicers and the creditors they serve also need a reliable backstop, whether through a Fed or Treasury line of credit, or a liquidity facility, so they can cover the payments they are obligated to pass through to investors. Fannie and Freddie have built up capital in the last year, and they have access to more than $200 billion through their Treasury line of credit. But other creditors need support as well, and the Treasury line is likely to be insufficient for this challenge.
Finally, there must be a broad moratorium on foreclosures and evictions, which is also a feature of the Brown package. Protecting consumers caught up in the middle of this crisis from losing their home is a paramount concern.
Housing still accounts for the largest portion of US households’ wealth. But for millions of borrowers it is housing on the installment plan. Now is the time to act quickly and without unnecessary requirements to make sure US consumers hit by the COVID-19 virus economic debacle don’t have to worry about whether they will continue to have a home in which to shelter in place.
Barry Zigas is a Senior Fellow at Consumer Federation of America and earlier served as its Director of Housing Policy 2008-2019. He was President of the National Low Income Housing Coalition from 1984-93 and Senior Vice President for Community Lending at Fannie Mae from 1995-2006.