Ten years of unprecedented housing debt accumulation on low interest rates created another housing bubble. | Source: AP Photo / David Zalubowski
- The housing market is teetering like a house of cards.
- Loan forbearances now represent nearly $1 trillion in unpaid principal.
- Short of a miraculous economic recovery, a wave of defaults is next.
The federal bailout of the housing market ballooned by a stunning margin in the last week. According to mortgage data company Black Knight, nearly 500,000 new loans went into forbearance in one week. It’s a 9% jump in homeowners seeking relief through the CARES Act forbearance plan. That’s bleak news for the housing market.
It brings the total to a bewildering 3.4 million borrowers who are unable to make their mortgage payments on time. The forbearances represent a staggering $754 billion in unpaid principal, plus unpaid interest on the loans. Consequently, mortgage servicers are feeling the squeeze from coronavirus, even with federal relief programs to lend them a hand.
And that’s just government-backed loans in forbearance. The housing market has another 740,000 mortgages owned by banks or private placement investors in forbearance. There’s over $200 billion in unpaid principal at stake in these loans.
Housing Market Teeters Like a House of Cards
At the rate the housing market is collapsing, unpaid principal on mortgages will soon top $1 trillion. But the problems are just getting started.
Homeowners under stress in a total lockdown economy are already unable to make payments, and forbearance plans will only buy them so much time. Once the federal relief comes to an end, the housing market will see a spike in mortgage defaults.
Fannie Mae and Freddie Mac, along with the Federal Home Loan banks, are allowing forbearance on mortgage payments for 12 months. That’s going to make life easier on homeowners in crisis, but it could bankrupt companies operating in the housing market.
This week, the Federal Housing Finance Agency announced mortgage servicers are still obligated to pay investors who own mortgages for four months, even while forbearing payments from borrowers.
Believe it or not, that’s a form of relief for housing market loan servicers. Before the announcement, they were on the hook for 12 months of payments, even with delinquent payments from homeowners.
Robert Broeksmit, CEO of the Mortgage Bankers Association, urged the Federal Reserve and Treasury last month to provide liquidity to survive a cash crunch.
Forbearance Plans Will Give Way to Mortgage Defaults
This initial unemployment claims chart shows what the housing market is up against. | Chart: Business Insider (Data: Federal Reserve Bank of St. Louis)
Bloomberg recently wrote “Think Great Depression” in terms of how bad the 2020 coronavirus recession could get. If it wears on for years as many analysts fear, the enormous shuddering we’re seeing in the housing market today will shake out in a wave of mortgage defaults and foreclosures. The market has toxic assets on its hands once again.
The housing market is preparing for the largest wave of delinquencies in history. Mark Zandi, chief economist for Moody’s Analytics, said today’s 4.14 million loans in forbearance could swell to 15 million households not paying their note. Quicken Chief Executive Officer Jay Farner says that will be enough to break most mortgage servicers.
Mortgage lenders are battling economic uncertainty by raising minimum credit scores, requiring higher down payments, triple-checking employment status, and even eliminating certain loan types altogether.
But it’s too little, too late. Ten years of unprecedented housing debt accumulation on low interest rates created another housing bubble.
One world-famous Wall Street economist and global financial strategist warned before coronavirus became a pandemic that the U.S. debt bubble would “end miserably.”
It’s beginning to look like he was right.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com. The above should not be considered investment advice from CCN.com. The author holds no investment position in real estate or associated securities at the time of writing.
This article was edited by Josiah Wilmoth.