Friends Without Benefits
Unemployment insurance boosts under the federal CARES Act are over. Recipients saw their final federally-backed unemployment payment drop last week and knew it would likely be their last for a painful while. Even if you’re receiving state unemployment insurance, there’s no guarantee your payments going forward will be anywhere near the federal $600. With so many American homeowners using these CARES Act checks to cover their housing payments, what’s going to happen next?
They're Calling It a Mortgage Crisis
They’re right. Over 4 million homeowners missed their housing payment in May 2020, according to data & analytics firm Black Knight. This is reportedly the biggest drop on record since 2011. Whether or not we will match or surpass the pain felt during and after the Great Recession of 2007-2009 is yet to be seen. With a sudden vacuum in many people’s pockets, these statistics are going to become even more dire in the coming months.
Not only will the depletion of the CARES Act severely hurt those now in danger of missing their housing payments, but consumer spending overall will decrease as average household income decreases. As much as Americans are eager for life to return to some semblance of pre-coronavirus normal, it’s becoming more and more inescapable that we won’t be there for quite some time. Consumer spending, the backbone of the American economy, will take a nosedive as consumer’s spending power does the same. Without some kind of meaningful and substantial intervention and assistance from the federal government, economists’ predictions of a minimum 30% constriction during the third quarter of 2020 seems more and more likely to come to pass.
Whether or not you’re one of these millions of people worrying about how they’ll pay for a roof over their heads next month, you will eventually be impacted by this drastic shift. Without hope of a new stimulus bill allowing for sufficient unemployment benefits as COVID-19 continues to burn through the country, the economic life raft we were thrown via the CARES Act will disappear. When it vanishes, America’s economy will suffer as less and less money is put through it each day. As the economy suffers and constricts, even those with money to spend will see businesses they used to patron begin to struggle. When people can’t afford their houses, how likely is it they’ll be eager to buy things like new clothes, dinner out at a restaurant, or other non-essential items?
Unemployment benefits and stimulus checks are a hot-button topic both in Congress and at dinner tables across the country. Families who aren’t worried about losing their housing discuss how mass eviction and homelessness will affect their neighborhoods; will they see more “vagrant” types wandering the streets, or will their day-to-day lives not be affected in that way? Will petty crime go up as desperation grows? My neighborhood has seen a significant increase in car break-ins in the last couple of weeks even before the CARES Act boost ran out. Now that it is completely evaporated, we know we need to continue locking our cars at night.
Families who are worried about losing their housing are having even more complex and emotional discussions. The kids are going back to school online soon, but without the house, there won’t be any Internet for them to connect to, a desk for them to sit at, or regular meals to fuel their bodies and minds. Parents still have to go to work, but without the apartment, how can they make regular Zoom meetings without it being obvious they’ve been evicted?
America has been divided into two new classes of people since COVID-19 shut us down: those who are paid to remain at home (either working from home or collecting unemployment) and those who are paid only if they venture out to the office, the store, etc. to collect a paycheck. This division, another atop a society already ripping apart at other seams, is only going to increase when housing becomes a luxury and not a guarantee.
This imminent splitting of society is inevitable, regardless of if you “believe in” the science of pandemics or not. Millions of Americans are unable to work and earn at the level they were prior to COVID-19 entering the country. Their loss of income is reaching critical mass as they are unable to make housing payments. Mass eviction following nonpayment will further disenfranchise those already at the disadvantage of limited spending power in a country who thrives on spending.
Fannie Mae and Freddie Mac are the most commonly known, nearly personified, entities of the federal mortgage market. They will purchase your mortgage off the lender whose office you went to (or, more likely, the lender with whom you corresponded via phone, email, and Zoom) for your loan, thus enabling your lender to continue to offer more loans, which are then again sold on to Fannie or Freddie, and so on and so forth.
These two government entities only see profit when mortgages are paid back in full with interest. They love folks who don’t pay off their balances early; they are loath to lose even a dollar of interest on the initial loan balance. They are equally loath to initiate foreclosure on a property. Foreclosures can, but are not guaranteed to, result in a short sale, where the price paid for the property by its new owner does not match the remaining debt owed on the house. If a home was mortgaged for $150,000 but only sells for $125,000 after foreclosure, Fannie Mae is shorted $25,000 on their initial investment. This does not make Fannie Mae happy.
Let’s zoom back in to the millions of Americans about to lose their housing due to inability to pay. Landlords for apartment buildings and rental homes will potentially be saddled with carrying two mortgages as their tenants become unable to pay, and the secondary mortgage market (Fannie & Freddie) will be saddled with carrying the unpaid debt of, potentially, millions of loans. They’ll take a significant loss, the depths of which is yet unknown as income and consumer spending continues to plummet across the country. Without some kind of federal deus ex machina to swoop in and save (ideally) consumers or (more likely) Fannie & Freddie, the outlook is grim for everyone involved.
I take no pleasure in writing thousands of words about doom and gloom and how millions of people are screwed and it’s going to get a lot worse before it gets better. However, our new and inescapable reality is that we have further to go down into the depths of an economic depression before we begin to recover. Everyday Americans are going to be facing eviction now that federal unemployment benefits have expired. Despite this compelling incentive to go back to work, and even despite some of these folks continuing to work in a reduced capacity, there is about to be a housing crisis on top of an economic depression on top of a global pandemic.
Batten down whatever hatches you have left. Prepare as best you can for the impending economic and social fallout. Stay healthy.
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Jessica Mohr is a licensed real estate broker working in her hometown of Raleigh, North Carolina.