The Covid-19 Crisis and Rental Delinquencies
Rental delinquencies have become a major problem during the COVID-19 crisis. Delinquencies put renters at risk of losing their homes, and landlords at risk of failing to service their mortgages.
Take a look at what the government is doing to intervene, along with statistics and expectations for the weeks and months ahead.
Did President Trump Stop Evictions?
A federal eviction moratorium was enforced up until the end of July. However, the protections are no longer enforceable.
President Trump announced earlier this month that he was stopping evictions through an executive order. However, the wording of his order only directs the government to research whether a moratorium is necessary. Currently, renters don’t have federal protection enforceable by the courts.
According to a whitepaper published by academic figures from various public groups and universities , America could be facing an eviction crisis with up to 40 million people at risk. The social impact of this would be huge, with families and individuals losing their homes. Low-income earners are the most at risk, especially those who reside in apartments and similar dwellings.
Of course, missed rent payments are not just a problem for the renters. Property owners lose income, and if they are renting mortgaged properties, they risk not being able to cover their mortgages. According to the whitepaper, 65% of properties with up to 4 units and 61% of properties with up to 19 units are mortgaged.
Delinquent rent can lead to delinquent mortgages, compromising the entire mortgage and housing market.
Some States May Act Independently
States could act independently to protect renters during the COVID-19 crisis. Kentucky has already done this with its Healthy at Home Eviction Relief Fund. Announced by Governor Andy Beshear on Monday, August 25, 2020, this executive order ensures two key provisions for renters.
- Renters are entitled to 30-days notice when a landlord intends to begin eviction proceedings.
- During the 30-days, the landlord and tenant are required to meet and attempt to make payment arrangements.
- Landlords cannot add late fees, penalties, or interest to delinquent payments, dating back to March 6.
Other states could follow Kentucky’s lead, especially considering that Congress has stalled with its effort to provide a second round of Coronavirus relief.
How Bad is Rent Delinquency Today?
The statistics often show a different side of the story when compared to the news headlines. The National Multifamily Housing Council (NMHC) collects data from around 11.5 million apartment units each month to report in its rent payment tracker .
Here’s what the data says about payments made by rental households over the last five months.
- 2% made payments in April compared to 93.3% last year.
- 8% made payments in May compared to 93.0% last year.
- 2% made payments in June compared to 92.2% last year.
- 3% made payments in July compared to 93.4% last year.
- 0% made payments in August, compared to 92.1% last year.
Aside from June, the data shows that there has been a notable decline in rental payments made. Looking at the trend, it’s likely that payments in June could be down as much as 2% compared to 2019.
How Long Will It Take for the Market to Stabilize?
With the COVID-19 crisis uncontained in the United States, it’s impossible to predict just when the rental delinquencies will stabilize. A repeat of widespread economic shutdowns appears unlikely under the current administration. The job market lost 22 million jobs in March and April, but 9 million were added back in the past three months. 16 million people remained unemployed in July , and 8 million people were working part-time after working full time before the pandemic.
Rental delinquencies are linked to economic performance and employment figures. Lenders and landlords are likely to see a noticeable reduction in delinquencies as the economy recovers.
CMBS Loans and Mortgage Market Performance During the Coronavirus Pandemic
State lockdowns earlier this year and high unemployment figures have affected the home market in the United States. CMBS loans (Commercial mortgage-backed security loans) and even conventional loans backed by Freddie Mac and other organizations are at risk.
Delinquencies are likely to increase, at least according to some experts. The most bearish of analysts have warned that the U.S. market for commercial loans is close to collapsing.
Take a look at the latest facts and data that can help to gauge the market today.
Why Has the Market Stalled?
Liquidity is the biggest problem in the mortgage market today. The COVID-19 health crisis has made it difficult for American businesses to get access to liquidity. This has a knock-on effect of reducing their ability to pay employee wages and benefits.
According to a whitepaper post from Thomas J. Barrack , a prominent equity real estate investor, “The profound impacts of both the COVID-19 pandemic and the public health measures taken in response to it on the American economy have caused high-performing mortgage loans, grounded in solid economic fundamentals, to suddenly and sharply decline in value.”
As a solution, Barrack suggests that REITs, banks, and debt funds must develop a solution that allows flexibility for borrowers so that millions of jobs and the value of the industry can be protected. Repurchasing finance could be an essential element of any strategy implemented in the coming weeks and months.
Today, many borrowers who would have been engaged in the market prior to COVID-19 are now sitting on the sidelines. Even those that can afford to borrow may be unwilling to take risks with the economy underperforming and GDP set to produce its biggest slide in years.
How Mortgage Market Companies are Responding
The larger mortgage corporations understand the fragile position of the market, and they are making changes to ensure that lenders and borrowers are protected. A mortgage market crash would slow economic recovery and cause significant hardship for individuals and businesses.
Freddie Mac, one of the largest secondary mortgage companies in America, has implemented various changes to ensure stability. It has posted regular bulletin updates with temporary provisions to support the market during the COVID-19 crisis.
One of its most recent bulletins includes a change that requires self-employed borrowers to verify that their business is open and operating within 20 days of the note date. This was previously set at 10 days but was extended to provide relief for borrowers and mortgage sellers. This is just a single example of how mortgage market companies are trying to stimulate activity in the sector .
The government also funded extensive protections for homeowners earlier this year. FHA, VA, HSDA, Fannie Mae, and Freddie Mac secured loans were eligible for forbearance and mortgage relief.
Under the CARES Act, lenders and loan servicers have been forbidden from foreclosing until after August 31. Borrowers experiencing financial hardship related to the Coronavirus Pandemic have the right to apply for forbearance for up to 180 days, with the option for an extension of up to 360 days.
Fees, penalties, and additional interest are forbidden under the forbearance program, but borrowers must apply through their lenders. Full details were published by the Consumer Financial Protection Bureau earlier this year .
What Happens Moving Forward?
Congress failed to agree on a second round of stimulus, leaving many borrowers concerned about mortgage relief programs while the COVID-19 crisis still impacts the nation. While lenders are offering some flexibility for commercial and residential loans, there’s now little legislative protection for borrowers to fall back on.
Ultimately, the resilience of the market is likely to rely entirely on how long the economic recession lasts, and how quickly Congress can enact new policies to support the mortgage market.
Mortgage Forbearance During the COVID-19 Crisis
When the COVID-19 crisis broke out in the United States earlier this year, the federal government acted quickly to reassure families and businesses that the economy would be protected.
Almost six months after President Trump declared the Coronavirus to be a national emergency, the economy is in a recession and the home and mortgage markets are on shaky ground.
Federal efforts to protect the economy have mitigated the damage, but some of the most important programs are set to expire. Government-enforced forbearance programs are coming to an end, and this is what could change in the coming weeks…
Mortgage Forbearance Program Expires on August 31st
The Coronavirus Aid, Relief, and Economic Security (CARES) Act passed into law on March 27, 2020. Designed to provide sweeping relief and stimulus measures to the American economy, it featured some special inclusions for homeowners.
People with FHA, VA, USDA, Fannie Mae, and Freddie Mac loans were able to take advantage of a forbearance or mortgage relief program .
People affected by the COVID-19 crisis (whether through health problems or economic hardship) could ask their lender to allow up to 180 days of forbearance with reduced or delayed mortgage payments. Within the initial 180 days, homeowners could apply for an extension of an equal period, taking the total forbearance up to 360 days.
Homeowners can still apply for the program, but it will expire on August 31st. Some lenders may not have the resources to process a forbearance application between now and that time.
This creates a challenge for people who are still out of work and unable to pay their mortgages.
The House of Representatives attempted to pass a new law to replace the CARES Act, but it met resistance in the Senate and the Executive Office. Known as the HEROES Act, it would have extended unemployment benefits of $600 per week for people who lost their jobs during the pandemic.
Because the act never became law, it was superseded by Presidential executive order, allocating federal unemployment benefits of up to $300 per week for eligible people.
Without an extension to the forbearance program, and with smaller unemployment benefits, America could soon face a mortgage crisis… at least, that’s what many people expect. However, the data tells another story.
Forbearance Numbers Not as High as Anticipated
According to data reported by Black Knight research , forbearances are now below 4 million for the first time since April. In the second week of August, the number of mortgages actively under a forbearance program decreased by 71,000.
This leaves just 7.4% of all mortgage loans in forbearance. That’s 3.9 million out of a total of 53 million active mortgages.
Foreclosures and evictions will soon resume, but there’s hope that the relatively low number of people seeking mortgage assistance means that the risk of widespread foreclosures is low.
Will Politicians Push for More Forbearance Flexibility?
With Congress failing to reach a bipartisan agreement on a second round of Coronavirus stimulus, it seems unlikely that the federal government will mandate any new forbearance programs in the short term.
This could soon change however, with the Presidential election coming up, both parties will likely reveal new policies aimed at attracting American voters.
As it stands today, homeowners can request forbearance from their lender up until August 31, after which any payment agreements will need to be negotiated without the benefit of a Federally enforced program in place.
The Current Status of Unemployment Benefits and the Impact on the Rental Market
On July 25th, funding for the federal government’s $600 weekly benefit lapsed, leaving millions of unemployed Americans without a subsidy on top of state payments.
The Democratic-majority House of Representatives passed a bill ensuring that the $600 benefit would continue, but it was met with resistance from the Republican-majority Senate and the White House.
Instead, President Trump offered a $300 federal subsidy through an executive order, although eligibility is not as widespread as the earlier benefit. Learn how the benefit works today, and what it means for renters and the wider home market.
Benefit Payments Depend on State Involvement
Under the executive order, states will only be eligible for a federal subsidy if they contribute $100 to the weekly payment. For the unemployed to be eligible, they need to already receive at least $100 of subsidies from the state government.
This leaves many people unable to receive the federal subsidy. According to some states, the disparity is significant.
In Texas, up to 350,000 unemployed citizens won’t be eligible for the $300 benefit. These same people would have been eligible under the previous $600 weekly benefit backed by Congress.
States must apply to receive the additional funding, which will be administered by FEMA (Federal Emergency Management Agency). Up to 30 states have already applied. The states need to demonstrate that they have the infrastructure in place to disperse payments.
The $300 in federal funding is seen as a compromise. Many Republican lawmakers were initially opposed to extending the $600 benefit, claiming that it disincentivized people from looking for work.
However, some academics dispute the assumption. In a July report published by Yale University , researchers found that people receiving the generous $600 weekly benefit had “returned to their previous jobs over time at similar rates as others. We find no evidence that more generous benefits disincentivized work.”
It should be noted that even as some workers received more in federal subsidies than their previous salaries, they lost out on benefits like insurance subsidies, retirement programs, and even non-financial benefits like the opportunity for professional development.
Will Low-Income Earners Return to Work Now That Federal Subsidies are Reduced?
We can see from the most recent unemployment data that people are returning to work. This was happening before President Trump announced the $300 federal subsidy in his executive order.
As state lockdowns have eased, companies have reopened for business, and around 9.3 million of the 22 million jobs lost earlier this year have been returned to the economy, according to data from the Bureau of Labor Statistics .
Most of that figure came back to the economy in June.
Job Numbers and the Real Estate Market
With jobs returning to the economy, the home market has shown some signs of recovery.
- 90% of professionally managed rental households have paid rent (in part or whole) so far in August. 70% of independently managed rental households have done the same .
- 2% of mortgages are engaged in relief programs, a decline of 1.35% since June.
- Existing home sales increased by 24.7% from June to July but are down 21.1% annually .
The mixed results reflect the fragile nature of the market today. The COVID-19 crisis has hurt the economy, and it could take years to recover. As jobs return, households will become more confident with spending, and rent delinquencies should decline.
Home buying activity is clearly starting to recover, which is good news for the wider market, including the mortgage market.