Gimme Shelter
Quarantine has made us view our homes in a new light: They have taken the place of our offices, our restaurants, our houses of worship. Our homes have never been more important. Unfortunately, the current crisis is making it difficult for many families to hold onto their homes. And that will cause trouble for key players in the U.S. mortgage market.

The CARES Act included a protection for homeowners. Any mortgage guaranteed by Fannie Mae, Freddie Mac, or other public agencies (collectively, the government-sponsored enterprises or GSEs) can enter forbearance at the borrower’s request. No questions are asked; by simply asking the servicer for relief, six months of payments are deferred. At the end of that period, another six months is available upon request.

Forbearance is not forgiveness, and those missed payments will still come due. The law does not specify a repayment approach, which has led to a series of mixed messages for borrowers. No good would come of expecting them to make a six-month lump-sum payment at the end of the forbearance period. Rather, the mortgage notes are likely to be extended, with today’s missed payments appended to the end of the loan.

Unlike homeowners, renters have not been granted protection in national legislation. Many cities and counties have stopped eviction proceedings, allowing people to stay in their rented homes for a time. As of the first week of May, the National Multifamily Housing Council estimated that 80.2% of renters had partially or fully paid their May rent, surprisingly not far removed from the 81.7% that had paid at the same point in May 2019. However, the stress that tenants are feeling will not abate quickly.

In April, the majority of households received the cash stimulus afforded by the CARES Act. That lifeline payment helped keep many renters solvent, but it was just a one-time payment. Similarly, many tenants are probably benefitting from the expanded unemployment insurance benefit afforded by the CARES Act, but that supplement will expire at the end of July. Rent strikes are becoming more common, as tenants exhaust their financial resources.

Thus, we have two categories of payees receiving fewer payments: Landlords and mortgage servicers. Each of these parties has their own bills to pay.

Landlords who own properties outright face a risk of lost revenue if tenants can’t catch up to their rent payments. Large landlords that issue equity or bonds to finance their operations will get by; smaller landlords may feel the pinch. At best, they may qualify for a Main Street Business Lending Program loan to carry them through the crisis, but that loan will need to be repaid.

Landlords may still carry a mortgage on their properties. About 46% of multifamily mortgages are guaranteed by the Fannie and Freddie, and these are eligible for the same forbearance that single-family homeowners qualify for.

Mortgage servicers collect monthly payments from mortgagees and disburse them to holders of the mortgage-backed securities that contain the loans. Those servicers are now in a pinch: They are obligated to make coupon payments to bond holders on schedule, but they are not receiving cash to fund those payments. Non-bank servicers could be facing serious liquidity and capital trouble; they may be the next group in need of a lifeline from the Federal Reserve.