Coronavirus Could Make Loan Forgiveness A Problem For Housing Market

With the coronavirus thrashing the economy and stock market and putting millions of people out of work, there has been a rampant increase in the number of borrowers who may be unable to pay their mortgages.

But now The Coronavirus Aid, Relief and Economic Security Act, also known as the CARES Act, is a contingency plan just signed into law allows borrowers to avoid payments for up to a year and then have those payments attached on to the end of their loans. While this seems like a good idea, in theory, history could suggest otherwise, and it could have a prolonged effect on housing market ETFs like the iShares U.S. Home Construction Index Fund (ITB ) or the iShares Residential Real Estate ETF (REZ).

In what echoes the 2008 financial crisis, the $2 trillion stimulus package claims that borrowers do not have to show any proof of financial hardship. They can simply say they can’t pay.

“Low documentation and interest-only loans were okay as a small niche for otherwise qualified borrowers with specific circumstances,” said Frank Nothaft, chief economist at CoreLogic in Washington of the 2008 housing crisis. “The problem was that these risky loans became widely available to subprime borrowers.”

Roughly one-third of all mortgages in 2006 were low or no-documentation loans or subprime loans, said Nothaft.

While the coronavirus presents a different said of circumstances from those of the financial crisis, transparency is still crucial. In an interview Wednesday, the chief regulator of mortgage behemoths Fannie Mae and Freddie Mac, FHFA Director Mark Calabria, pleaded with borrowers, to be honest.

“We’re operating on the honor system. We are asking and we’re putting together a script for servicers. This is supposed to be limited to if you’ve lost your job, you’ve lost income. Please, if you haven’t lost your job, continue paying. If you can pay your mortgage please do so because we really need to focus on the people who can’t.”

While the market may be able to sustain such forbearance for a time, if the coronavirus continues to persist it could have greater dangers warns Calabria.

“If this goes beyond two or three months and we start to get worse than that, then that’s going to be a lot of strain, and certainly we’re going to start to see some firms get into a lot of liquidity trouble,” he added.

“The truth is that subprime really didn’t as much go away as it went into FHA, so you have a lot of FHA borrowers who I think are vulnerable. The real question is the duration of this,” Calabria explained.

In addition to housing, the massive stimulus package that is the CARES Act is also scheduled to aid colleges as well as primary and secondary schools to help meet those unexpected expenses.

“There is real money in this bill,” concedes  Ben Barnes, the chief financial officer for Connecticut State Colleges and Universities.  “The problem is, we don’t know how much we’re going to have to spend.”

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