What happens to struggling homeowners when CARES Act relief ends?
WASHINGTON — Congress tried to address the immediate financial hit of the coronavirus on homeowners when it passed a sweeping $2 trillion stimulus package in March, but lawmakers are increasingly focused on the potential economic burdens facing mortgage borrowers when many of the legislative provisions expire as early as July.
A Senate Banking Committee hearing Tuesday with two housing policymakers focused in part on what happens to borrowers when relief such as loan forbearance plans and enhanced unemployment compensation end.
"We have to extend unemployment compensation, because many of the people who are still paying [their loans back] are doing so only because they're getting enhanced unemployment compensation,” said Sen. Jack Reed, D-R.I.
The Coronavirus Aid, Relief and Economic Stability Act added $600 a week for unemployment insurance, provided homeowners with a 60-day foreclosure moratorium on federally backed properties, froze evictions of for 120 days on federally backed multifamily properties, and allowed borrowers with a government-backed mortgage to request up to 12 months of forbearance if they have encountered financial hardship because of COVID-19.
Lawmakers grilled Federal Housing Finance Agency Director Mark Calabria and Department of Housing and Urban Development Secretary Ben Carson on the possibility of an imminent housing cliff approaching in August, with fear evident on both sides of the aisle but no clear consensus about what comes next.
“We have already seen a huge number of mortgage borrowers enter forbearance, while many landlords are struggling to make ends meet, and countless renters are unsure whether they will be able to make their next payment,” said committee Chairman Mike Crapo, R-Idaho.
While Calabria and Carson spoke positively about the performance of the housing market during the pandemic thus far, the two also underscored the uncertainties going forward and hesitated to give an “all clear.”
“It's obviously going to be very important for us to monitor the situation, see how much recovery is going on, and obviously we are not going to sit idly by and watch millions of Americans suffer for something that's not their fault,” Carson said.
The CARES Act did not specify how or when borrowers would make skipped payments after a forbearance period ends, but numerous agencies and some servicers have suggested homeowners can wait the whole the life of the loan.
Still, Reed and others said they were worried borrowers would be in a position to make up any missed payments, even at the end of the loan, particularly if the term is cut short by a foreclosure.
“We're looking at a real employment problem and a funds problem, that even if forbearances [were] tacked on to the end, people still might not be able to pay and that would suggest to me that we need to do several things,” Reed said.
Calabria told senators Tuesday that 6.4% of Fannie Mae and Freddie Mac loans are currently in forbearance, but that about one-third of those borrowers continue to make mortgage payments, likely because of the extra unemployment benefits. Those benefits will expire July 31.
“I certainly agree the top line about the point about this being fundamentally a jobs and income issue and do think that's where we should focus,” he said.
Carson later added that he would support further enhanced unemployment compensation “as necessary.”
Both Calabria and Carson also faced some pressure to extend the foreclosure and eviction moratorium, respectively, at the FHFA and the Federal Housing Administration — an independent agency within HUD.
While the CARES Act provided for an initial pause on foreclosures, the FHFA and FHA unilaterally extended their own freezes on foreclosures until the end of June. The eviction moratorium is set to expire July 24.
Calabria told the committee to expect an announcement on the FHFA’s foreclosure moratorium “within a week,” but that the agency would likely only extend it a month at the most.
“I don't think we'd want it to be any more than two months just because we can always extend it again, as we start to see how the economy evolves, so my preference here is to give people enough certainty without necessarily locking us in,” he said.
But others felt that with last week’s job report, showing a surprising drop in the unemployment rate to 13.3% from 14.7%, Congress had already provided borrowers with enough support to navigate the pandemic.
Sen. Tim Scott, R-N.C., theorized that “getting folks re-engaged in their monthly [loan] responsibilities is a good thing long-term" and would help borrowers avoid having to repay large sums of missed mortgage payments.
“[For] people who have limited incomes and limited savings, the deferral has been helpful, and that's good news,” he said. “But I'm afraid of creating an issue where that one, two or three months, divided over several months is still a bit too much for people to absorb. So the faster we get back to normal, the better off we will be, especially as the economy starts to percolate a little bit.”
Calabria emphasized that the FHFA is working to soften "payment shock” for both borrowers and renters.
“We're trying to be able to make sure that people can get current again as much as we can, so certainly we're really focused on trying to minimize how many of these loans actually eventually go into real delinquency or foreclosure,” he said.