If I know anything at all about human nature, it’s that we will always do what’s in our best interest over the common good. We will almost always act independently according to our own self interest even if that means putting others at risk. This is most true when it comes to money.
Since the CARES Act was signed into law, a tsunami of homeowners has rushed their mortgage banks asking to take advantage of the forbearance entitlement provided by the legislation. I’ve seen some early estimates that approximately 2 million homeowners have applied in the less than 3 weeks the legislation was enacted.
The problem is, even though this legislation is well intended to preserve homeownership it doesn’t change a critical and often overlooked fact and that is, these mortgage banks are still required to make tens of billions of dollars in payments to security investors. Now, to the average man on the street, this may not seem like a big deal because they wrongfully assume their mortgage bank has tucked away hordes of cash as some sort rainy day fund. The reality is much more dire than most of us know.
Out of an over abundance of caution, let me explain this another way. John and Jane Smith want to buy a home so the run down to their local mortgage lender, ABC Home Loans LLC, who offers to give them a mortgage. All John and Jane must do is make a monthly payment, every month for the next 30 years. What the ABC Home Loans LLC then does is sell off John and Jane’s mortgage to another bank, XYZ Investments LLC, who then bundles their mortgage with potentially a hundred other people. When XYZ Investments bundles these mortgages together it becomes a mortgage backed security. XYZ Investments then can sell slices of shares of that MBS (Mortgage Backed Security) to investors who then collect dividends of those monthly mortgage payments that John and Jane make.
Even though mortgage lenders started doing a better job ensuring applicants were more credit worthy in recent years, partially due to the lessons we learned during the MBS crisis of the Great Recession, the truth of the matters is, I don’t think we could have ever foreseen a pandemic national emergency that would lead to over 16 million jobless in 3-4 weeks. Combine this with the fact that a reported 78% of Americans say they live paycheck to paycheck and nearly 50% of those say that they aren’t able to save anything more than $100.00 a month along with mortgage lenders being legislated to offer up to 12 months forbearance and I’m not sure the MBS market can hold up under that sort of pressure.
It’s simple, when homeowners stop making mortgage payments, MBS’s will begin to suffer, and value will begin dropping. Once again, for the average man, that may not seem like a big deal, they may not understand how that impacts them but, let me try saying it this way. MBS’s are everywhere. They can be found in retirement and pension funds across the spectrum. In fact, if you have any sort of retirement account, chances are, you have some sort of MBS or at least a collateralized debt obligation (aka CDO) from an MBS. When John and Jane don’t pay their mortgage, it will have a direct impact on all of us.
Try as hard as the government may, at the end of the day, increased jobless claims will equal foreclosures. If you can’t pay your mortgage, you can’t stay in the home. We might be able to postpone the inevitable but, at the end of the day, homeowners need a job and they need to be working to maintain homeownership. If we continue to see multi-million jobless claims per week, up to June or even July, as recently predicted, I fully expect to begin seeing conventional foreclosure claims as early as September or October 2020. As for the CARES Act will likely postpone most government insured mortgage foreclosures for at least 6 months and potentially a year, I would expect a trickle or FHA / HUD / VA / USDA / FDCI and Fannie Mae / Freddie Mac foreclosure early winter 2020 with the majority hitting early summer 2021.
Keep in mind, this isn’t the whole story. I haven’t even discussed what happens to housing inventories, supply and demand cycles, equity depreciation, etc… In this article, I’m just trying to inform and educate people as to what impact simply not paying your mortgage has on your bank and why it’s so important to pay that mortgage if you can. I know and understand we will all do what’s in our own best interest but make no mistake, not paying a mortgage when you can hurts us all, in the long run.