How the Fed Can Protect the Housing Market – and Why It Should
While the CARES Act stimulus bill recently signed into law provided short-term, temporary relief from monthly mortgage and rent payments for millions of Americans, the law still requires those payments be made when the forbearance period ends.
The CARES Act was silent, however, on how those payments should be made, how borrowers and renters should be treated when they can’t pay, and how the businesses of all sizes that depend on those payments will be protected from an economic crisis they had no role in causing. Failure to address these questions will put the housing market at risk and threaten the economy’s recovery:
- Millions of homeowners will struggle to catch up on the payments they owe after forbearance, leading to delinquencies, defaults, loan modifications, and foreclosures.
- Millions of renters will struggle to pay their back rent, face additional fees, and risk eviction.
- Hundreds of thousands of rental properties, of all sizes in all markets, will have depleted their reserves, deferred essential maintenance, and failed to pay utilities and other essential costs to remain viable.
- Thousands of businesses (many of them small businesses) and public agencies that make up the housing finance system ― mortgage lenders, loan servicers, apartment owners, state and local agencies ― will suffer economic losses, starting as soon as this month and worsening over time, because borrowers and renters simply cannot pay what they owe during the emergency.
Recent moves by Ginnie Mae and FHA, while helpful, only partially address these issues. FHFA has indicated that it does not see Fannie Mae and Freddie Mac providing any near-term solutions.
The good news is that the CARES Act provided all the resources and authority necessary to avoid these problems, at a small fractional cost of the alternatives.
The concept is simple: The Federal Reserve should create a loan program ― as authorized in the CARES Act ― to cover shortfalls in monthly payments (principal and interest, and escrows for insurance, taxes, and mortgage insurance) otherwise owed by owners during the emergency. A program we envision would provide sufficient financing to:
- Enable approximately 8 million low- and moderate-income homeowners to avoid default on their mortgages despite layoffs and unemployment, and
- Enable more than 13 million low- and moderate-income renters to remain in their units and avoid rent arrearages they will not be able to make up after any rent forbearance.
The funding would run through the entities that service homeownership and rental apartment loans ― the businesses and agencies most directly harmed by borrower forbearance policies. The federal funding would simply cover the payments these entities stood to receive before forbearance.
The funding would be a loan ― not a giveaway. Recipients (loan servicers) would pay a fee to the Treasury to access the capital they need during the emergency. Property owners would repay it, at zero percent, at the end of their mortgage loans. Strong consumer protections would be included.
More detail on how the loan program would work, for owner-occupied homes and rental apartments, is here.
In addition to protecting millions of Americans from serious, lasting economic harm, the loan program we envision would deliver benefit for other key stakeholders.
For apartment owners:
- Covers shortfalls in scheduled monthly payments despite tenants paying less rent.
- Helps cover basic operating costs of properties.
- Avoids loan delinquency and default.
For single-family and multifamily loan servicers:
- Avoids the significant financial consequences of collectively needing tens of billions of dollars in liquidity for scheduled advances on mortgage-backed securities or loans in the coming months.
- Avoids the need to modify millions of home mortgages and tens of thousands of apartment loans.
For capital providers (holders of mortgage-backed securities, housing bonds, and other capital):
- Provides expected and necessary payments.
- Reduces prepayments on their investments due to loan defaults.
- Avoids deficits and foreclosure losses to bank multifamily lenders.
For federal government agencies:
- Provides a long-term solution for loans on which agencies provide forbearance.
- Maintains the integrity of the advance system for Ginnie Mae, Fannie Mae, and Freddie Mac mortgage-backed securities, without needing any agency loans to servicers.
- Avoids defaults and foreclosure losses for FHA, VA, RD, Fannie Mae, and Freddie Mac.
For Federal Reserve and Treasury:
- For the Fed, a $66 billion commitment that is fully repaid at the current 10-year Treasury yield + 100 basis points (est. at 2%).
- For Treasury, a $44 billion equity investment of which $33 billion is expected to be recovered, based on average life of loans, requiring a net investment of $11 billion.