Recent moves by Ginnie Mae and the Federal Housing Finance Agency to help mortgage servicers meet some of their short-term financial needs fail to defuse the ticking time bomb that could inflict lasting damage on millions of low- and middle-income families and blow a hole in an economic recovery from the COVID-19 crisis.
In a matter of months, the temporary reprieve from eviction for not paying rent provided by the CARES Act for federally assisted properties will end. Unpaid back rent will still be due. Those who received forbearance could end up seeing their payments effectively double for the remainder of their leases, “a crushing burden for most renters,” according to Laurie Goodman and Dan Magder of the Urban Institute. An increase in evictions seems inevitable.
And what about the apartment owners—many of whom are small businesses and nonprofit organizations? Fannie Mae and Freddie Mac, the country’s largest multifamily lenders, have offered owners a brief period to make up mortgage shortfalls. But how many owners will find tenants who will pay higher rents than before COVID-19? Owners’ only choices will be to deplete reserves, delay important health and safety maintenance, or default.
Homeowners, too, will be hard pressed to pay their forborne mortgage payments when they come due. Some will be able to work with their lenders to modify the terms of their loans, but many will find themselves in default. Moody’s chief economist Mark Zandi projects as many as 2 million resulting foreclosures.
Not only will this coming spike in unsustainable housing costs exact a huge toll on American households, it will have harmful ripple effects for the Realtors, lenders, building managers, and construction workers whose livelihoods depend on a healthy housing market.
None of this needs to happen. The same federal stimulus bill that established mass mortgage forbearance also provided unprecedented authority to the Federal Reserve to stabilize the economy. Leading members of Congress in both parties have asked Treasury Secretary Mnuchin to put some of that authority to work for housing, but that hasn’t happened.
Some have suggested it’s because federal policymakers are reluctant to “bail out” the servicing industry, even though nobody in it had anything to do with causing the current crisis. In any event, the best way to structure Fed support is to focus on fixing the underlying problem: the fact that millions of households will soon face housing costs they cannot reasonably meet.
The Fed should offer assistance to apartment owners on behalf of their renters and to homeowners through their loan servicers. The assistance should cover the mortgage and rent payments the servicers would have received during the federal forbearance periods. Owners should be required to repay the advances, at 0%, when they pay off their mortgages. Servicers should have to pay a fee to access the Fed funding and commit to meeting strong consumer protections.
A Fed program that would include these features could be created relatively quickly. The National Council of State Housing Agencies has developed an approach that would protect roughly 20 million renters and homeowners from serious hardship for a tiny fraction of what Congress has authorized the Fed to invest.
The Fed program we envision probably wouldn’t reach all the households who will need assistance—no single program would. Congress should also increase funding for emergency rental assistance and create a housing assistance fund, as proposed by Sens. Jack Reed (D-R.I.) and Sherrod Brown (D-Ohio) and Rep. David Scott (D-Ga.).
The housing market has not yet been hit as hard as other sectors of the economy by the COVID-19 crisis. But with unemployment claims and mortgage forbearance requests rising sharply, it’s only a matter of time. As federal policymakers work hard to stabilize critical businesses and industries, they shouldn’t forget the renters and homeowners on whom they all depend.
