Stein and Purviance Talk about Housing Policies

On May 7, Sarah Stein, Atlanta Fed community and economic development adviser, and Domonic Purviance, senior financial specialist in the Supervision, Regulation, and Credit Division, explained current housing policies related to mortgage relief, forbearance, and rental affordability. They also talked about eviction moratoriums and answered some of your questions.

Transcript

Princeton Williams: Thank you for joining us today for the fifth episode of the Federal Reserve Bank of Atlanta’s webinar series examining our recent actions and continued response to the COVID-19 pandemic. My name is Princeton Williams, and I'll be your moderator this morning. We're excited to have Sarah Stein, an adviser on our Community and Economic Development team, and Domonic Purviance, a senior financial specialist in our Supervision, Regulation, and Credit division, as our guest speakers. They will explain current housing policies related to mortgage relief, forbearance, and rental affordability. They will also talk about eviction moratoriums. We'll then transition to our Q and A segment where they will answer some questions that were submitted at registration. So with that I'll turn it over to you, Sarah. Thank you so much for joining us today.

Sarah Stein: Thank you, Princeton. And thanks to all of you for tuning into this webinar. I want to begin by saying that the thoughts expressed in this presentation are my own, and they do not represent the position of the Federal Reserve Bank of Atlanta, the Federal Reserve System, or the Board of Governors.

So this presentation is to provide you with a quick overview of some key elements of how COVID-19 is impacting housing, particularly among homeowners and renters who have lost income. First, it's important to keep in mind that whether or not housing is affordable depends on how much income a household has. Generally, a house payment is considered affordable if it requires no more than 30 percent of household monthly income.

It's also important to approach the current situation with an understanding of the housing landscape heading into the COVID-19 phenomenon. Since prerecession peak, home ownership rates have dropped precipitously, and renter households have increased. Rents have outpaced wage increases, leading to a deficit of affordable units. In the southeastern states that make up the Sixth District, which are Florida, Georgia, Alabama, Mississippi, Louisiana, and Tennessee, there was a deficit of more than one million units available for extremely low-income renters. These are renters who make less than 30 percent of area median income, or who fall below the federal poverty line.

Evidence shows that COVID-19-related job loss will impact low-income renters the most, leading to a substantial uptick in the number of extremely low-income renters who will be increasingly cost burdened and unable to pay their rent. In the face of this landscape, many states have implemented eviction and foreclosure moratoriums intended to stave off the most dramatic effect of widespread inability to pay.

Mass loss of housing. In addition to individual state efforts, Congress tackled this issue in the Coronavirus Aid Relief and Economic Security Act, otherwise known as the CARES Act, which passed on March 27, 2020. That legislation contains some key provisions designed to temporarily address Americans’ inability to make their house payments. It's important to note that the CARES Act does not apply to every single homeowner or renter across the country. Rather, its scope extends only to those whose homes are already tied to the federal government through subsidy or support.

For homeowners, the CARES Act provides an initial foreclosure freeze, and then forbearance plans for impacted borrowers. These protections only apply to properties that have a federally backed mortgage, meaning that during a purchase, refinance, or renovation of a property, the owner secured a mortgage that was insured by the VA, the FHA, or the USDA, or that was subsequently purchased or securitized by Freddie Mac or Fannie Mae. And these mortgages account for an estimated 70 percent of residential mortgages nationwide.

So the CARES Act foreclosure freeze applies automatically to residential properties that have one to four units and are financed by federally backed mortgages. During this freeze, a servicer may not initiate or continue with the foreclosure process. The freeze lasts for a 60-day period that began on March 18, 2020, and that will end on May 17, 2020, which is about 10 days from now, unless it's otherwise extended. The foreclosure freeze applies to all federally backed mortgages automatically, regardless of COVID-19 impact on a borrower.

Now in addition to the initial foreclosure freeze, the CARES Act lays out an opportunity for borrowers to enter into a forbearance agreement. In the forbearance period, the borrower does not need to make regular payments on the loan and the servicer is not allowed to charge late fees or penalties or report the borrower as delinquent. Borrowers who have federally backed mortgages on a one- to four-unit residential property and who affirmed that they have been directly or indirectly impacted by COVID-19 can request and receive an initial forbearance of up to 180 days. And during this initial period, they can then also request and receive another forbearance of an additional 180 days or less. The CARES Act also provides forbearance plans to owners of multifamily properties with federally backed mortgages.

Now on the rental front, the CARES Act lays out a 120-day moratorium on eviction activity. That applies to rental units that are either federally subsidized affordable housing units, so units with a housing choice voucher or in a HUD subsidized development, for example, or also units that are in a property with a federally backed mortgage, as I mentioned earlier. Although it's very difficult to nail down exactly how many or what percent of the national rental market is covered by this eviction moratorium, we estimate that the coverage lies between 28 and 45 percent of all rental households nationwide. The 120-day moratorium began on March 27 and runs through July 25, 2020. It also provides a 30-day notice requirement for any evictions that are filed after the moratorium ends.

These CARES Act housing provisions mark a very important first step in addressing some of the most immediate fears surrounding housing and COVID-19. However, these provisions leave some notable gaps and challenges that need to be addressed. First, as we've already discussed, not everyone is covered. Roughly 30 percent of borrowers and anywhere from 55 to 72 percent of renters are not protected by these provisions at all. Unless their individual states have taken action otherwise, a loss of income could lead to the loss of their housing during this time period.

Second, each of these programs provide a stop-gap solution, and it has an identifiable endpoint. Fortunately for homeowners, the federal housing finance agency has recently announced that borrowers will not be expected to pay forbearance plan balances in a lump sum. But a clear path forward does not been established. For renters, after their 120 days of eviction protection, their total unpaid rent will still be due on July 26, and if they're unable to pay it, they may simply face a delayed eviction. If that is the case, housing courts across the country may be overrun with a backlog of evictions to process, and communities could face an onslaught of emergency housing needs in the midst of what may be an ongoing pandemic.

Furthermore, landlords who have been unable to collect rent may accrue outstanding expenses and obligations that they will be unable to meet, threatening their ability to maintain their properties. In the face of these challenges, some policy solutions that decision makers may want to consider include providing legal assistance to assist tenants in benefiting from eviction moratoria, and to help negotiate work-outs that will keep them housed. Local jurisdictions and states could consider establishing housing diversion courts that will focus on keeping tenants in their homes and negotiating rent reductions and payment plans. Decision makers could also launch programs that provide housing counseling and legal services to homeowners who will need assistance securing forbearance and navigating post-forbearance transition. And then federal, state, and local actors could explore the creation of rental assistance funds, particularly programs that involve landlords, since rental assistance benefits both the tenant and the landlord.

These programs could craft agreements that lead to ongoing financial security for landlords and better housing outcomes for tenants. So those are just some of the many possible solutions that policymakers can consider as they tackle the unprecedented challenges that this coronavirus pandemic has wrought. And I encourage interested participants to take a look at the National Consumer Law Center, the National Housing Law Project, and the National Low Income Housing Coalition's resources on these topics for more information, ideas, and thoughts. I appreciate everyone's time and interest in exploring the housing impacts of this pandemic, and I look forward to continuing this discussion with Domonic and Princeton.

Williams: Very good. Thank you so much, Sarah. That was very helpful. Before I ask the first question, I just want to remind everyone that Sarah and Domonic will be answering questions that were submitted during the registration process. So the first question goes to Sarah. How could I know if my mortgage or my rental unit is eligible for the relief that the CARES Act provides?

Stein: This is a great question, because a lot of people are curious. I mean, there's this list of what eligibility is, but how does any specific homeowner or renter know if they are eligible? And on the homeowner front, in order to know if you are eligible for forbearance, you would need to find out if you have one of those government-backed mortgages. And if you think you have a FHA, VA, or USDA mortgage, you could look at the papers that you got when you first started the loan, and that documentation will indicate if you have one of those loans. However, you may or may not know whether your loan is owned or securitized by Fannie Mae or Freddie Mac, so, Fannie Mae and Freddie Mac both have online tools that allow you to look that up. And we're going to send out the links to those online tools so that people who are interested can check that out and see if they're eligible.

Additionally, for renters, that's maybe a more difficult question in some ways in the sense that a lot of renters, you wouldn't necessarily know if your landlord even has a mortgage, much less if it's owned or securitized by Fannie Mae or Freddie Mac, or if it was some sort of FHA mortgage. So there are a growing set of tools that are available for tenants to use. Fannie Mae and Freddie Mac, excuse me, Freddie Mac both have lookup tools for tenants, and we'll send out links to those. Those will cover any multifamily properties that have mortgages, any multifamily mortgages that are in Fannie Mae or Freddie Mac portfolios or securitization. And so they can use that to look up that.

And there's also a database that the National Low Income Housing Coalition has pulled together. And that's going to incorporate what Fannie Mae and Freddie Mac have probably, in addition to federally subsidized affordable housing units. And it won't include housing vouchers, but it will include a good number of developments that fall under the federally subsidized affordable housing category. So, we'll send out those resources in a follow-up email in case people are interested in engaging with them.

Williams: Very good. Thank you, Sarah.

Stein: Absolutely.

Williams: So this next question might go to Domonic. How are individual landlords, those with as few as one or two units, with renters sidelined by the COVID emergency, going to get relief to pay for necessary expenses? Domonic, you might be muted.

Domonic Purviance: I am. Can you hear me now? OK, great. So, the first thing to recognize is that the single family... So, so far what we know from the single family rental market is it's a little bit more stable than we would have expected in terms of April rent. From the survey that we looked at from NAR, about 24 percent of tenants have requested some sort of accommodation, and the landlords have been able to work with them. And that compares to 47 percent in multifamily spaces. So it's a little bit more stable than we expected so far. Now it is expected that as we move into May and into June, you may see a little bit more strain on renters being able to make their rents.

So in terms of accommodations offered to landlords, I would refer you back to the resources that Sarah mentioned. If a landlord has a loan that is agency backed, then it would be theoretically included in the forbearance requirements. And so theoretically if you're a landlord, you can talk to your lender and negotiate some sort of forbearance. Now we are aware that there's a significant amount of landlords that do not have mortgages that are agency backed, and so our recommendation is that you contact your servicer. And our understanding just anecdotally from talking to several market participants is that lenders are open to offering some sort of accommodation to their borrowers even if the loan isn't federally backed.

The last thing I'll mention is there is some conversation about accommodations and support that may be offered to landlords, that those conversations are happening in Congress. So far, there isn't a definitive conclusion, and so we don't have anything to report at this time. But if you are a landlord and you are having some issues collecting rent from tenants, there is a moratorium on evictions, and so that will create some strain. And so our recommendation is that you contact your bank and make some sort of accommodations.

Williams: Sarah, did you have anything to add to that?

Stein: The only thing that I would add is that since rent subsidy programs would be a subsidy not just to the tenant but also to the landlord, landlords could look around in their local jurisdictions and maybe state options. Some money is coming through from the federal government that states and localities are able to choose how to use, and if they set up tenant support systems for rent payments, then maybe landlords can encourage their tenants to participate in that and be able to collect some of that.

Williams: Great. Another question for Domonic. How will the Federal Reserve measure liquidity levels in the mortgage market to determine how and when to begin to modify in support of that market?

Purviance: OK. And so, liquidity issues are a big concern for us that we've been monitoring since the beginning of the crisis. For those of you who may not kind of understand or need a little bit more clarity about what the issues are, so there are mortgage companies that service mortgages that are required to advance principal and interest payments to investors, regardless if they are collecting rent from tenants. So it's not just principal interest payments, I should add; it's taxes and insurance as well. And so the more tenants, the more borrowers that are delinquent or that requested forbearance, there is less funds to forward advances, and so there are liquidity issues that services would incur if the rate of forbearance increases.

And so far there's been some accommodations made from Ginnie Mae and Freddie Mac and Fannie Mae. And Ginnie Mae services, so these are more entry level borrowers, kind of FHA mortgages. Services can request, can borrow funds from Ginnie Mae to kind of cover some shortfalls. For Fannie Mae and Freddie Mac, servicers are only required to forward principal and interest payments for four months. Under both systems, there’s the borrowers from my understanding, the service is still on the hook for taxes and insurance. So that cost is not necessarily abated.

Still, it's an issue. So the thing that we're monitoring to measure the impact of liquidity and particularly in the servicers, are the number of mortgages that are in forbearance. So, according to data that we have from a company called Black Knight, they're about 7.4 percent of all mortgages that are currently in forbearance. It's a little bit higher for FHA mortgages, o it's about 10.4 percent. From what we're hearing from industry professionals, if the number of mortgages in forbearance and in delinquency reaches about 20 percent, then they would have significant liquidity issues.

So we're not there yet. I will say that we expect the number of delinquencies and foreclosures to increase as we move further on in the crisis. And even if you don't reach that 20 percent threshold, we do expect some services to experience some liquidity issues. At the time we are not aware of any accommodations that are being offered by the federal government that would support the servicers other than what I already mentioned, the provisions provided by Ginnie Mae and the GSEs.

Williams: Very good. Thank you. One more for you, Domonic. Do you anticipate a substantive decline in the residential real estate values compared to the Great Recession?

Purviance: Yeah, this is a big question, and I think we've been asked this a lot. The first thing I will say is that price and home values are a product of supply and demand. So in order for you to have a significant decline in home prices, supply would have to significantly exceed demand. And that's what happened in the previous crisis. So you had a significant contraction in demand. There was a significant oversupply of housing inventory that created a significant downward pressure on price.

Going into this crisis at the beginning of the year, we actually had the opposite situation. So we had very tight inventory levels. The measure that we look at to look at inventory is a measure called month's supply, and it measures how many months it would take to absorb the current amount of inventory given the current rate of absorption. And so the month's supply going into the crisis was about 3.3 months, according to the National Association of Realtors. And equilibrium or a balanced supply is somewhere between four to six months. And so in order for us to see significant downward pressure on all home prices, you would have to see supply levels get somewhere above six months of supply. So we got a long way to go before we hit a place where I think we're going to experience significant downward pressure on price.

But what's happened so far, obviously demand has contracted significantly. There's some credit issues that just—there's a high rate of unemployment; we'll get those numbers tomorrow, get exact figures. So there's less demand in the market. But there's also less supply. There are people that have pulled their homes off the market, they decided not to list, decided it's not a good time to sell. And those sellers that are listing homes on the market are not offering at this point any discounts. There's resistance to that.

In the new home sector, builders aren't over overextended in terms of supply in general. There may be some that are, but in general, most are not. And there isn't really a whole lot of pressure as of yet to offer any kind of incentives. And so all of this implies that so far prices have been relatively resilient through the crisis. So if you're in the market trying to buy a house now and you're expecting a big discount, you're going to be disappointed. Now that may change moving forward, if people are listing their homes on the market and it takes a little bit longer to sell, they may be willing to offer some discounts. And also, if we do see an increase in foreclosures in the future, it may cause some additional downward pressure on price.

But as of yet, we haven't seen that, and it appears that home prices are relatively resilient. And it doesn't appear like the conditions that were in play during the last crisis that caused a significant downward pressure on home prices exist currently. And so that's relatively good news if you're concerned about home prices and home values.

Williams: Very good. Thank you so much for that information. We have about eight minutes left. And I wanted to toss the final question first to you, Sarah. And Domonic, you can be thinking about your answer while Sarah is on the hot seat. But Sarah, I wanted you to think about what are a couple of important lessons that you've learned so far from this really unprecedented situation?

Stein: OK. Just a couple, huh? OK. Well, I think that we see things moving very quickly and challenges kind of emerging at breakneck speed. And I think that the need to analyze these challenges and come up with good responses has to happen at a fast pace, which feels like high pressure. And that requires both feet and some humility to check back in and inform actions with the kind of on-the-ground situation as things emerge, leaving room for modification of your response if what you start with doesn't work or things take an unexpected turn. So I think that would be sort of one thing I'm experiencing regularly.

And then maybe on a more personal note, my spouse and I started a vegetable garden in our yard, which originally I would think that I had no talent or time to do, but it's been such a source of grounding and relaxation. And in doing it, I realized that really is probably something I did have time to do all along during normal time. So I guess my take away from that would be that challenging times like this sometimes reveal good things, joys that have been within reach for a long time.

Williams: That's just delightful, thank you. And Domonic, how about you?

Purviance: Well, one of the biggest challenges that we've experienced so far is our ability to obtain market intelligence. So, in normal times we have a whole bunch of data. The Federal Reserve of course we're collecting tons of data to be able to analyze the market and be able to make decisions, be able to identify risks. But if you are trying to understand what's happening now, your data is going to be behind. So, the latest housing data is in February, or maybe we have some data from March. So you're trying to make a decision ... and trying to understand market conditions in May using February's data is not going to be very helpful.

And so we've spent an incredible amount of time calling market participants and stakeholders and sending out emails and trying to get an understanding of what's going on for more anecdotal information. And it's changing rapidly by the day. And I do think that anecdotal information is helpful. You do get an idea of what people are experiencing in real time, but it's very hard to qualify it, quantify it, so you have to really kind of make your best guess. And oftentimes, we started at the beginning of this crisis, it's like playing whack-a-mole. It's like, what issue do we tackle? And where you think the issues are, aren't necessarily where they ended up being. And so it's very hard to anticipate. This is a very unique crisis. We typically can see a recession, and it’s kind of a slow-moving recession, and we kind of can respond to it in real time. This is a situation that happened very rapidly within a month.

We'll get our numbers tomorrow, but jobless claims are over 30 million people. I don't know if we've seen anything move that fast. And so, the Federal Reserve trying to be on top of decisions is critical, and that's been a big challenge for us. I'm very proud of how our teams responded, and how we continue to stay on top of things. Just on a personal note, I've been stuck at home for the past two months, and I realized how much I enjoy being at home and not having to deal with traffic every day. So it's pretty convenient.

Williams: I don't think any of us are missing Atlanta traffic, so I'm guessing that's a nationwide phenomenon. So, thank you both for this incredible conversation. This has been very helpful, so we appreciate your time. And as we wrap today, I want to thank both of you for participating and on behalf of everyone, I'd like to thank you for joining us. We'll continue to host these webinars and highlight additional actions that the Fed is taking to support our communities during these uncertain times. If you know someone that would find this session valuable, an audio file and a transcript will be archived on our website at frbatlanta.org.

I would like to draw your attention to the Text to Join slide that will be populating on the screen very soon. If you aren't already a subscriber, I encourage you to subscribe to our weekly digest newsletter for the most up-to-date information by texting FRBA to 33777. Once again, text FRBA to 33777.

And finally, be sure to join us for our next event Monday, May 11, at 11 a.m. Eastern. We will have Stuart Andreason, director of the Atlanta Fed Center for Workforce and Economic Opportunity. Stuart will provide an overview of data on unemployment claims and strategies to re-employ workers who have lost their jobs. He'll also answer some of your questions that you can submit during the registration process. We look forward to seeing you there. With that, I'll bring this session to a close. Thank you for joining us. Take care, and stay safe.