While COVID-19 is still on the rise, and no one knows when all of this will be over soon, its impact on things will still occur in the near future. Over the past several months, when the cases of COVID-19 are at their peak, changes have happened in different industries, including real estate. The year 2020 is slowly becoming a catalyst for another housing crisis, so the government created several countermeasures to avoid another housing crisis like in 2008.
While one of the most talked-about topics is the government’s Stimulus Bill, the most important discussion is about the forbearances the government gave people on their federally backed loans. The forbearance given by the government has a mixed effect on the mortgage industry. It’s vague whether the forbearances had a positive or negative effect on the real estate industry in general.
What is forbearance?
Forbearance is typically given to those homeowners who are currently financially struggling because of an unprecedented event like the COVID-19 pandemic. With a government forbearance plan, a homeowner will have some breathing room from his financial struggles.
But what does it do?
Simple, forbearance is for federally backed loans only, and if you have one, the forbearance will temporarily suspend or lower your monthly installments on them. It doesn’t erase your loan, and the regular installment will continue once the current situation is over (if you haven’t paid it all yet).
Along with the government’s Stimulus Bill, it’s much easier for people to pay off their loans. But what if I already have a federally backed loan even before the forbearance plan was given? You will be tagged as current by the credit bureau and will still be eligible for the forbearance plan as long as you are still paying off that loan.
It’s important to remember that forbearance doesn’t erase your debt. It only makes things easier until the situation is over. However, with the forbearance plan, you would also not be penalized for paying late, as long as you are still going with the repayment terms given by your lender.
But how did the forbearance plan or COVID-19 pandemic affect home loans and the real estate industry in general?
As you can imagine, the interest rate dramatically dropped because of the government’s forbearance plan, which gave the people a lot of room to refinance their loans. This caused the lender to have his loans paid off sooner than expected, which means losses on their part.
Most of a lender’s income comes from interest rates, and having them lowered and the loans getting paid off sooner is a massive loss in their incomes. Also, given that a single person can have several loans in his name, it’ll even be a more significant loss for the lender.
But how is this a dilemma?
With the Stimulus Bill and the forbearance plan making loan refinancing more comfortable, a spike in people looking to get more loans is inevitable. With this new loan activity, it’ll be easy for the lenders to recoup their losses.
Rise in Unemployment
Due to the COVID-19 pandemic, the government issued a lot of multiple lockdown mandates, causing a lot of people to lose their jobs and sometimes it may cross your mind that you decide to sell your house off-market and resort to renting because the mortgage stimulus won’t be enough.
This has been the highest unemployment rate the US has ever seen, and it’ll go down in history. Because of the high unemployment rate and loss of steady income, many people miss their payments on their loans.
Even with the government’s assistance like the forbearance plan and the Stimulus Bill, a high percentage of people are still missing their due dates, which makes the mortgage industry take a huge hit. Also, because of this severe impact on the mortgage industry, owners of mortgage-backed securities create a considerable fuss, which jeopardizes their trust in the lenders.
In the government’s attempt to make life easier for people who have financial struggles, they are creating problems for servicers. Because of the forbearance granted to the people by the government, servicers will be forced to forward the payment for the loans even though they haven’t received it yet.
However, given the fact that a loan can’t be sold to an investor if the borrower doesn’t make the first payment, the servicers would have to hold the asset themselves. This will tie up their available credit, which is a considerable loss.
The COVID-19 pandemic indeed changed a lot in all our aspects of living, especially with our home loans. Because of it, the government launched several assistance programs for people who are having financial trouble at the mortgage industry’s expense. However, this assistance will not be viable in the long run. Instead, it will significantly impact the credit industry.