Note: The following is a general discussion on the specified topic or issue and may not be relied on as legal advice in any specific case or matter you encounter. You should review any applicable case, or matter with counsel experienced in this area of law and should not generally rely on the discussion in this Alert.
Date: May 13, 2020
To: All Scheer Law Group Clients and Affiliates
From: Spencer Scheer
Subject: YOU AIN’T SEEN NOTHING YET: Will Stimulus and Forbearance ever end? Then what?
Section 4022(c)(2) of the CARES Act currently allows mortgage forbearance to any borrower requesting it on a federally backed loan i.e. GSE.
Proposed federal legislation (HEROES Act), adds $3T more stimulus for renters and homeowners and $11B in additional grants. Mortgage forbearance would be extended on all single family mortgage loans. (See https://www.nafcu.org/newsroom/pelosi-unveils-heroes-act-more-coronavirus-relief?utm_source=NAFCU+Today&utm_medium=Email&utm_campaign=daily+news&_zs=llHef1&_zl=DM9m6/
The C-19 pandemic is unprecedented. Everyone needs help, some more than others. Conversely, the race to add more stimulus, print money and pile on debt will have severe consequences. There has not even been a pause to consider the effect of over $7T in stimulus over the last 90 days and the effects of recent attempts to restart the economy.
Nothing is free. Someone must pay for “free stuff.” Many SLG clients are now wrestling with the issues of mortgage forbearance, and how their borrowers will repay the “mini balloon payments” that are accruing, with the prospects that up to twenty percent of their borrowers will be unemployed and that many will not return to their jobs. The effect of ongoing stimulus on the mortgage origination market will grow, as the ability to originate and sell delinquent mortgages (in forbearance) elevates risk, freezing up credit and eventually raising the cost of credit. Meanwhile, for those loans in place, accrual of debt to unemployed or under-employed borrowers carries increased risk of default, and calls for more debt moratoriums and forbearance.
This is not a liquidity crises brought on by specific economic shocks e.g. “Dot Com/Dot Bomb”, “Mortgage Meltdown” that can be addressed by short term infusions of liquidity to solvent businesses who are cash starved. This is a structural crises. Many businesses (and unfortunately borrowers) will never be coming back to health. Traditionally, bankruptcy would usually be the tried and true option. A failing business would file, would discharge or pay little owing to unsecured creditors, and would pay nothing to shareholders. If the business had any continued vitality (e.g. airline) it would be sold to a new entity or ownership group that could continue the business free of the debt burdens that could not ever be repaid. If no business vitality, the business would be liquidated and discontinued.
Under current policies, bankruptcy is now being avoided by many borrowers and small businesses who are kept alive by stimulus alone. Again, no one is to blame for C-19 , so there is an all-out attempt to save everyone and hope for the best. The likely short term result will be a temporary lull in defaults and bankruptcy filings and then a massive increase in both, that will no longer be avoidable. Long-term and if current policies continue: Unfettered stimulus, grants and debt moratoriums will eventually jeopardize the dollar as a reserve currency, inflate, and devalue every dime anyone has saved or invested.
Extending mortgage forbearance on all single family loans is just a small vignette. Prudent lenders and servicers will see the bigger picture and both hedge and plan for this potential scenario so they come out of it alive and well. We “ain’t seen nothing yet.”
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