Nobody Knows How to Ever Get Out of This Mess

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by Wolf Richter, Wolf Street:

“Extend and Pretend” forevermore.

Until a few months ago, most Americans didn’t even know what “forbearance” was. Now, roughly four million home mortgages, or about 8% of all home mortgages, are in forbearance. Those four million households with mortgages in forbearance might still not fully understand what forbearance is, but they know one thing: They don’t have to make mortgage payments for a while, and they get to spend that money on other things instead of sending it to the bank.

There are forbearance deals offered by lenders for credit cards and auto loans. I don’t owe any balances on my credit cards and I don’t have an auto loan, but my inbox gets blasted with offers of forbearance anyway, by every bank I do business with.

My WOLF STREET media mogul empire too. It’s just a tiny business, and it doesn’t owe any money, but sure enough, my bank is offering “assistance” with those debts that my business doesn’t have.

When a lender agrees to grant the borrower forbearance, the lender agrees to not exercise its rights when the borrower doesn’t make the loan payments. There is an agreement both parties sign, and this forbearance agreement determines, among other things, the period of forbearance, and what happens afterwards. And afterwards those missed payments will have to be made up somehow. Forbearance is not forgiveness.

But a forbearance agreement can be extended, if both parties agree to do so. In banker’s lingo, it’s called “extend and pretend.”

So, the borrower is not making payments, and the bank doesn’t receive interest and principal payments, but since the loan is in forbearance, the borrower is not deemed in default and the lender can continue to show interest income on the loan, though no interest is being paid.

That’s the motivation for lenders: Rather than having to show the loan in default, and taking a hit on their earnings, they can continue to book unpaid interest as income, and show the loan as performing.

Some people want forbearance because it would be nice not to have to blow a bunch of money on mortgage payments or credit card payments or auto-loan payments, and instead be able to spend all this money on other things.

Other people want forbearance because they lost their job or businesses, and financially all heck has broken loose in their lives.

Other people again want forbearance because they lost their jobs, and even with the extra $600 a week in federal unemployment benefits, they still can’t meet their mortgage payments. This is a real problem in expensive markets with high salaries.

In its latest report last week, the Labor Department said that nearly 32 million people continued to claim either state or federal unemployment benefits. 32 million people is a lot of people on the unemployment rolls. That’s 20% of the workforce.

So then there is the whole category of unpaid rents. Depending on who is doing the counting, the number of renters who haven’t paid their rents is either huge or just a small-ish increase over normal. No one knows.

According to the National Multifamily Housing Council, which represents landlords with large apartment buildings, 91.3% of apartment households paid their June rent as of July 20. This is down only two percentage points from July last year.

On-time rent payments – meaning June rent paid by July 6 – dropped by 2.5 percentage points, compared to a year ago, to 77.4%.

OK, a couple of percentage points worse than a year ago isn’t the end of the world, but applied to tens of millions of renters, it’s still a large number that are now in trouble, that weren’t in trouble before the pandemic.

Internet-based surveys of renters have been all over the place, many of them with far higher non-payment numbers, but they were just internet surveys.

Extend and pretend works with rents too.

There is rental relief, at the local, state, and federal levels. These generally take the form of eviction bans. Local eviction bans mean that the local government suspended eviction filings and will not process evictions until a certain date, and they may put other restrictions on landlords.

The federal rental relief under the CARES act provided eviction protection for 120 days. But it pertains only to apartment buildings that have been financed with a federally backed mortgage, and buildings covered under a couple of other federal programs. So it doesn’t apply to all buildings.

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