So a lender friend called me tonight. He told me how he’s got amazing rates for Conforming loans and very good rates for High Balance Conforming loans but his Jumbo loans are gone. Only a few big banks are doing Jumbo he said. This of course is reminiscent of 2008 when the financial markets seized up and no one could get financing done except through a handful of big banks. He also said all his investor clients are stock piling cash so they can pounce when the foreclosure market comes back. “Hmmm…” said I. To which my friend said, “What, you don’t think that’s what’s going to happen?” “No” I said, “I do not.”
This is an interesting conversation that I thought I should delve into. Of course, I am only speculating, and I could be just as wrong as anyone else; just as easily as I could be right (Reach out to Tim here). If you’ve ever read my blogs before, you know I am never afraid to put my Carnac hat on and put my two cents worth of opinions out there. Right or wrong, I’d like to hazard a guess as to what’s going to happen next. So here goes.
I told my friend that I did not think we are going into a period of substantial foreclosures. On the contrary, I believe the Federal Government is going to give mortgage and rent forgiveness. In fact, the $2T stimulus passed last week even includes some rent and mortgage deferment opportunities. Many states are already announcing freezes on evictions. HUD has said much of the same on the government backed loans like FHA. No one wants foreclosures and a repeat of 2008. I am convinced that the Federal government is going backstop the banks having learned from the financial crisis. I think the time will come when the Feds condition all the bank bailout monies on short term mortgage forbearance. Let me explain my thinking.
What is the largest expense most American face every month? Cars, student loans, credit cards, private schools? No, it’s housing. (Search for Homes Here) Housing for families either in rent or mortgage and same for businesses in the form of commercial leases. Whether that be in very expensive states like California or less expensive like Arkansas. Whether that be homeowners, tenants or landlords, housing is the biggest monthly expense. And let’s not forget, landlords. Landlords mostly have mortgages too. Big commercial landlords and mom and pops. This is where the proverbial Covid 19 rubber hits the road. As the pandemic goes from days to weeks to months, the economic toll will increase. For the moment, the concern is keeping small business alive so it can come back. But what happens when this goes on far longer than many are willing to say? The cost goes up and the pittance the government is going to send most Americans will only cover food and utilities. Rent and mortgage become the obvious pitfall.
So then, what is to happen? I predict Washington will step in and not let anarchy prevail. Something will need to be done and that something is mortgage and rent forbearance. Why? Supporting banks answer is the easiest thing for the government to do. They have the Federal Reserve and the Treasury. So, hear me out: The best way to keep households and businesses solvent is to put a freeze on their largest expense. This will mean however that the holders of those notes and servicers, will need compensation. Again, this is where the Federal Reserve can play a part and support the banks and keep them whole. Out of fairness, those property owners without mortgages will have to receive tax credits via the Treasury.
Mortgage and rent expense, is the key. Put it on hold until the economy gets back on its footing and we can survive. Allow foreclosures and you guarantee that banks and investors will strip the nation of its wealth, create a homeless crisis which in turn will lead to a health crisis and then we end up with that movie we’ve all seen and no one wants that. Some counties are already moving in this direction by allowing time if you miss payments to repay and get current, and by preventing evictions. What I’m talking about is on a national scale.
Let’s see how this plays out. I personally feel this will go longer than most expect but that the fundamentals of the economy and real estate specifically can weather this storm. And think about this: As we are all sequestering and sheltering in place, think about your home. If you’re stuck in place for weeks or months on end, you better like your home and if you don’t or if you’ve been renting waiting to buy, you have to be thinking, “Get me out of here!” Yes, as soon as this passes, people are going to want to buy. Hopefully in a couple weeks the crisis shows signs of abating and more drastic measures won’t be required. Let’s pray for that outcome but as we do, let’s also begin thinking about what happens next in the event this drags on much longer than we hope.