30% Of All Mortgages Will Default In “Biggest Wave Of Delinquencies In History”
Unlike in the 2008 financial crisis when a glut of subprime debt, layered with trillions in CDOs and CDO squareds, sent home prices to stratospheric levels before everything crashed scarring an entire generation of homebuyers. 30% Of All Mortgages Will Default In “Biggest Wave Of Delinquencies In History”
This time the housing sector is facing a far more conventional problem: the sudden and unpredictable inability of mortgage borrowers to make their scheduled monthly payments as the entire economy grinds to a halt due to the coronavirus pandemic.
And unfortunately this time the crisis will be far worse, because as Bloomberg reports mortgage lenders are preparing for the biggest wave of delinquencies in history. And unless the plan to buy time works – and as we reported earlier there is a distinct possibility the Treasury’s plan to provide much needed liquidity to America’s small businesses may be on the verge of collapse – an even worse crisis may be coming: mass foreclosures and mortgage market mayhem.
Borrowers who lost income from the coronavirus, which is already a skyrocketing number as the 10 million new jobless claims in the past two weeks attests, can ask to skip payments for as many as 180 days at a time on federally backed mortgages, and avoid penalties and a hit to their credit scores. But as Bloomberg notes, it’s not a payment holiday and eventually homeowners they’ll have to make it all up.
According to estimates by Moody’s Analytics chief economist Mark Zandi, as many as 30% of Americans with home loans – about 15 million households – could stop paying if the U.S. economy remains closed through the summer or beyond.
“This is an unprecedented event,” said Susan Wachter, professor of real estate and finance at the Wharton School of the University of Pennsylvania. She also points out another way the current crisis is different from the 2008 GFC: “The great financial crisis happened over a number of years. This is happening in a matter of months – a matter of weeks.”
Meanwhile lenders – like everyone else – are operating in the dark, with no way of predicting the scope or duration of the pandemic or the damage it will wreak on the economy. If the virus recedes soon and the economy roars back to life, then the plan will help borrowers get back on track quickly. But the greater the fallout, the harder and more expensive it will be to stave off repossessions.
“Nobody has any sense of how long this might last,” said Andrew Jakabovics, a former Department of Housing and Urban Development senior policy adviser who is now at Enterprise Community Partners, a nonprofit affordable housing group. “The forbearance program allows everybody to press pause on their current circumstances and take a deep breath. Then we can look at what the world might look like in six or 12 months from now and plan for that.”
But if the economic turmoil is long-lasting, the government will have to find a way to prevent foreclosures – which could mean forgiving some debt, said Tendayi Kapfidze, Chief Economist at LendingTree. And with the government now stuck in “bailout everyone mode”, the risk of allowing foreclosures to spiral is just too great because it would damage financial markets and that could reinfect the economy, he explained.
“I expect policy makers to do whatever they can to hold the line on a financial crisis,” Kapfidze said hinting at just a trace of a conflict of interest as his firm may well be next to fold if its borrowers declare a payment moratorium. “And that means preventing foreclosures by any means necessary.”
Take for example Laura Habberstad, a bar manager in Washington, D.C., who got a reprieve from her lender but needs time to catch up. The coronavirus snatched away her income, as it has for millions, and replaced it with uncertainty. The restaurant and beer garden where she works was forced to temporarily shut down. Laura has no idea when she’ll get her job back, nor does she have any idea how to look for a new job. After all, how do you search for another hospitality job during a global pandemic? Now she’s living in Oregon with her mother, whose travel agency was also forced to close.
“I don’t know how I’m going to pay my mortgage and my condo dues and still be able to feed myself,” Habberstad said. “I just hope that, once things open up again, we who are impacted by Covid-19 are given consideration and sufficient time to bring all payments current without penalty and in a manner that does not bring us even more financial hardship.”
Borrowers must contact their lenders to get help and avoid black marks on their credit reports, according to provisions in the stimulus package passed by Congress last week. Bank of America said it has so far allowed 50,000 mortgage customers to defer payments. That includes loans that are not federally backed, so they aren’t covered by the government’s program.
Meanwhile, Treasury Secretary Steven Mnuchin has convened a task force to deal with the potential liquidity shortfall faced by mortgage servicers, which collect payments and are required to compensate bondholders even if homeowners miss them. The group was supposed to make recommendations by March 30.
“If a large percentage of the servicing book – let’s say 20-30% of clients you take care of – don’t have the ability to make a payment for six months, most servicers will not have the capital needed to cover those payments,” QuickenChief Executive Officer Jay Farner said in an interview. But not Quicken, of course.
Quicken, which serves 1.8 million borrowers, and in 2018 surpassed Wells Fargo as the #1 mortgage lender in the US, has a strong enough balance sheet to serve its borrowers while paying holders of bonds backed by its mortgages, Farner said, although something tells us that in 6-8 weeks his view will change dramatically. Until then, the company plans to almost triple its call center workers by May to field the expected onslaught of borrowers seeking support, he said.
Ironically, as Bloomberg concludes, “if the pandemic has taught us anything, it’s how quickly everything can change. Just weeks ago, mortgage lenders were predicting the biggest spring in years for home sales and mortgage refinances.”
Habberstad, the bar manager, was staffing up for big crowds at the beer garden, which is across from National Park, home of the World Series champions. Then came coronavirus. Now, she’s dependent on her unemployment check of $440 a week.
“For us, it was a no-brainer,” he said. “It’s worth the follow-through.”
Commercial Properties’ Ability To Repay Mortgages Was Overstated, Study Finds
Many borrowers are now struggling because of coronavirus, though study finds income often fell short of underwritten amount before the pandemic.
Thousands of commercial-mortgage borrowers have been struggling to meet payments on their loans in the midst of the coronavirus pandemic. But there might be another reason so many are falling behind: aggressive lending practices that overstated borrowers’ ability to repay.
A study of $650 billion of commercial mortgages originated from 2013 to 2019 found that even during normal economic times, the mortgaged properties’ net income often falls short of the amount underwritten by lenders. The underwritten amount should be a conservative estimate of how much a property earns. Instead, the actual net income trails underwritten net income by 5% or more in 28% of the loans, according to the study of nearly 40,000 loans by two finance academics at the University of Texas at Austin.
The study shows risks in the $1.4 trillion market for commercial mortgage-backed securities, or CMBS, where loans on malls, apartment buildings, hotels and the like get packaged into bonds bought by investors, often with guarantees from the government. The findings suggest that loans sold to investors before the pandemic frequently featured overstated income and could have more trouble staying current in case of a downturn.
The findings corroborate a complaint received last year by the Securities and Exchange Commission stating that commercial mortgage loans frequently feature inflated financials. They also come at a sensitive time for the commercial-mortgage-backed securities industry, which has been seeking a lifeline since the spring, when the Federal Reserve left out swaths of the market from its $2.3 trillion economic-rescue package.
Congressional legislation introduced last month is seeking to help the industry survive the pandemic, which has sent commercial loan delinquencies to near-record highs.
John Griffin, a finance professor and co-author on the study, says his findings provide evidence that the commercial-mortgage industry is at least partly to blame. He found that when the pandemic hit, loans with inflated income were quicker to enter watch lists for troubled loans maintained by loan servicers. Income was overstated by more than 5% in more than 40% of loans originated by UBS, UBS 0.33% Starwood Property Trust STWD 2.56% and Goldman Sachs Inc., GS 0.77% the study said. Loans from these originators were among those most likely to be on a watch list, Mr. Griffin found.
“This is a direct function of the aggressive underwriting,” Mr. Griffin said. He disclosed in his paper that he owns a fraud-consulting firm, Integra FEC LLC, which could benefit if the government or investors acted against the bond issuers.
UBS and Goldman Sachs declined to comment. Starwood said it has “consistently experienced strong performance across its portfolio of originated loans.” The Commercial Real Estate Finance Council, which represents the industry, called Mr. Griffin’s study flawed and said the industry’s record on underwriting was solid.
The organization’s chairman, Adam Behlman, said the study should have used long-term cash flow to judge the underwriting and said the originators identified in the study had lower-than-average default rates on their loans. “Defaults are the ultimate barometer of the quality of the underwriting,” Mr. Behlman, a Starwood executive, said.
The expected income generated by a property is an important factor in how much the owner can borrow. The bigger a property’s net income, the bigger the value and thus the loan it can support. Shaving a few hundred thousand of expenses or claiming additional income can add millions to a loan’s size, which can benefit borrowers by giving them room to cash out equity from properties. Higher net income also makes loans worth more, enabling more profit for originators.
Mr. Griffin’s study doesn’t definitively answer the question of who might be inflating loan financials. But it does provide evidence that the industry is aware of the practice. Mr. Griffin found that loan originators charged higher interest rates for loans with overstated income, suggesting they viewed them as riskier. Kroll Bond Rating Agency Inc. and DBRS Morningstar, two rating firms that grade CMBS bonds, also tended to treat inflated loans more skeptically in their rating models, the study found.
Kroll declined to comment. DBRS Morningstar said that analyzing loans’ cash flows is a key element of its rating process and that it consistently applies its criteria when grading deals.
Borrowers, lenders and their representatives have a lot of leeway in calculating a property’s earning power. Unforeseen circumstances such as a natural disaster can also take a bite out of expected income after a loan is originated. Sometimes, however, fraud can play a role, too, according to federal prosecutors.
In 2019, the SEC and the Justice Department each filed fraud cases against Robert Morgan, who had borrowed about $3 billion to amass a multifamily property empire that once spanned more than 34,000 units across 14 states. Prosecutors alleged that Mr. Morgan conspired to create fictitious leases at some of his properties to make their income look bigger than it was. The SEC alleged that he ran a Ponzi-scheme-like scam that used investors’ money to “repay an inflated, fraudulently obtained loan” on one of his properties.
A lawyer for Mr. Morgan said he is “vigorously defending against the criminal charges.” The SEC, which recently disclosed that it has reached a tentative settlement with Mr. Morgan, declined to comment.
The SEC has been aware of potential income inflation in CMBS loans since at least February 2019, when it received a complaint about the issue. The complaint, earlier reported by ProPublica, pointed to a pattern of inconsistent figures in different financial reports providing income for the same property in a previous year.
Mr. Griffin’s study validates inconsistencies in such overlapping reports. In a subsample of 2,172 loans, Mr. Griffin found that 70% of loans exhibiting income inflation of 5% or more in the first year of the CMBS deal also overstated properties’ historical financials.
The SEC declined to comment on the complaint. John Flynn, a CMBS industry veteran who filed the complaint, said that after poring over thousands of loans, he feels relieved to see someone else spot the same pattern.
“It’s much more widespread than I even realized,” Mr. Flynn said.
“Everybody wants to work but we’re being asked not to for the sake of the greater good,” she said.
FHA Mortgage Delinquencies Reach A Record
Federal Housing Administration mortgages — the affordable path to homeownership for many first-time buyers, minorities and low-income Americans — now have the highest delinquency rate in at least four decades.
The share of late FHA loans rose to almost 16% in the second quarter, up from about 9.7% in the previous three months and the highest level in records dating back to 1979, the Mortgage Bankers Association said Monday. The delinquency rate for conventional loans, by comparison, was 6.7%.
Millions of Americans stopped paying their mortgages after losing jobs in the coronavirus crisis. Those on the lower end of the income scale are most likely to have FHA loans, which allow borrowers with shaky credit to buy homes with small down payments.
For now, most of them are protected from foreclosure by the federal forbearance program, in which borrowers with pandemic-related hardships can delay payments for as much as a year without penalty. As of Aug. 9, about 3.6 million homeowners were in forbearance, representing 7.2% of loans, the MBA said in a separate report. The share has decreased for nine straight weeks.
Housing has held up better than expected in an otherwise shaky economy, with record-low mortgage rates fueling sales of both new and previously owned houses. With job losses mounting and Congress slow to act on a fresh stimulus package, that momentum could be threatened.
New Jersey had the highest FHA delinquency rate, at 20%. The state also had the biggest increase in the overall late-payment rate, jumping to 11% in the second quarter from 4.7%. Following were Nevada, New York, Florida and Hawaii — all states with a high proportion of leisure and hospitality jobs that were especially hard-hit by the pandemic, the MBA said.
But the current spike in delinquencies is different from the Great Recession, thanks in part to years of home-price gains and equity accumulation, according to Marina Walsh, vice president of industry analysis for the bankers group.
A Million Mortgage Borrowers Fall Through Covid-19 Safety Net
Some homeowners don’t know they qualify for a relief program that allows them to delay payments.
About one million homeowners have fallen through the safety net Congress set up early in the coronavirus pandemic to protect borrowers from losing their homes, according to industry data, potentially leaving them vulnerable to foreclosure and eviction.
Homeowners with federally guaranteed mortgages can skip monthly payments for up to a year without penalty and make them up later. They must call their mortgage company to ask for the relief, known as forbearance, though they aren’t required to prove hardship.
Many people have instead fallen behind on their payments, digging themselves into a deepening financial hole through accumulated missed payments and late fees. They could be at risk of losing their homes once national and local restrictions on evictions and foreclosures expire as early as January.
“Some borrowers are falling through the cracks that we’re not picking up,” said Lisa Rice, president and chief executive of the National Fair Housing Alliance. “It’s just a really sad series of events.”
About 1.06 million borrowers are past due by at least 30 days on their mortgages and not in a forbearance program, according to mortgage-data firm Black Knight Inc. Of those, some 680,000 have federally guaranteed mortgages and thus qualify for a forbearance plan under a March law. The rest have loans that aren’t federally guaranteed, and their lenders aren’t required to offer forbearance, though many have chosen to do so.
“Borrowers who are eligible to be in forbearance will preserve their options to avoid foreclosure, versus those who became delinquent and have accumulated penalties and interest in a march toward foreclosure,” said Faith Schwartz, president of Housing Finance Strategies, an advisory firm.
Lenders and consumer groups said the number of past-due mortgages that aren’t in forbearance could grow as several million people who are in forbearance reach the six-month point of their plans by the end of October. An extension of up to six months is possible, but homeowners must ask for it. Lenders said they are reaching out to these borrowers before their forbearance periods expire.
Some 250,000 of the six million borrowers who were in forbearance at one point since the pandemic began are again delinquent on their homes, according to Black Knight.
The borrowers who are falling through the forbearance safety net represent a small portion of the roughly 53 million active mortgages in the U.S. Lenders and consumer groups said these consumers tend to be among the more financially vulnerable, with lower incomes and weaker credit scores.
A recent survey of the National Housing Resource Center found that 56.6% of respondents didn’t know about the forbearance program. An even larger share of consumers were confused about their options, including 69.9% who said they feared being required to make a large lump-sum payment at the end of the forbearance period.
A group of consumer advocates and housing-policy experts have discussed starting a national ad campaign to educate borrowers about their options, but the effort is in the early stages. A group of government agencies have set up a website designed to educate borrowers about their alternatives, but consumer groups said more work is needed to reach at-risk borrowers. Lenders that collect mortgage payments said they have boosted their outreach to borrowers.
“Servicers are absolutely reaching out to borrowers who are delinquent and not already in forbearance,” said Pete Mills, a senior vice president at the Mortgage Bankers Association. “For borrowers who haven’t called or are avoiding talking to their servicer, it’s important that they connect with them in order to understand their forbearance options.”
Sue Stevenson, a mortgage-default counselor near Seattle, said homeowners have had trouble getting through to mortgage-service companies on the phone. Calls are often sent to voice mail and not returned, she said. Other times, calls are answered but dropped. Borrowers must then call again and endure yet another lengthy hold period.
Compounding the problems, Ms. Stevenson said, representatives responding to questions read from jargon-laden scripts that can confuse or scare borrowers. For instance, the first option most borrowers are given to make up missed payments is to pay a lump sum at the conclusion of the forbearance period.
“Representatives are restricted in what they are allowed to say, leading to misunderstandings because it’s not in layman’s terms, so it can just be so confusing,” she said.
The Mortgage Bankers Association and lenders said requests for forbearance as well as call hold times are both down significantly since the beginning of the pandemic. Meanwhile, most borrowers who have needed assistance since the crisis began have been able to enter forbearance plans and are now beginning to exit their plans or seek extensions.
Some borrowers said the process is still confusing.
Susan Mclaren Shiflett got a forbearance this summer after her work hours were cut at a retailer in Wenatchee, Wash. But she was thrown for a loop when her servicer, Guild Mortgage Co., still sent her warnings that she was past due on her mortgage and that she was at risk of foreclosure.
She said a company representative told her the letters were required by law. Even so, she said: “It’s just scary every time they send a letter of being delinquent. I’m doing everything I’m supposed to do.”
In a statement, Guild said it “recognizes the impact and confusion of these notices going to the borrower and is committed to educating customers about their purpose.”
Commercial Closures Are Causing A Ripple Effect Impacting The Residential Sector
The departure of building-anchoring retail can erode rent premiums and increase the costs for some homeowners.
When the coronavirus pandemic seized the U.S., Allen Morris had a plan for Maitland City Centre, a 220-apartment community with a 35,000-square-foot commercial space that claims a whole city block in Maitland, near Orlando, Florida. Mr. Morris, who helms the eponymous development company, would not seek rent from the Centre’s restaurants, which included a gelato shop and several concept eateries, if they stayed operational during Covid-19.
“We took the initiative to go to our restaurant tenants on the ground floor,” Mr. Morris said. “And we said, ‘Look, don’t worry about paying your rent. Just, you must stay open, you must promise us to stay in business because it’s so beneficial to the leasing of our apartments.”
In a time when urban developments across the U.S. are bleeding renters to the suburbs, Maitland City Centre boasts a 94% residential occupancy rate, Mr. Morris said. To a large extent, he attributes that to the presence of commercial tenants, especially food and beverage establishments that have provided convenient dining and takeout options for residents amid the pandemic.
“I believe that the commercial elements and the residential elements in a mixed-use project are entirely symbiotic,” Mr. Morris said. “They benefit one another and create a synergism in a mixed-use project that you don’t get in a standalone building.”
That mutual advantage, however, seems to have somewhat eroded during the pandemic, which has triggered the bankruptcies of major retailers in the caliber of Neiman Marcus, which was to have occupied New York City’s Hudson Yards on Manhattan’s far West Side. The volatile economy is also threatening numerous small businesses and experiential retail, which struggled to stay afloat during the nationwide shutdowns this spring.
According to commercial real estate data provider CoStar, so far this year, retailers have laid out plans to shutter 130 million square feet of stores in the U.S., a record driven by the disruption of foot traffic and the acceleration of e-commerce caused by coronavirus. Most commercial closures will affect malls, CoStar said, but residential buildings that also house retail are not immune. The typical commercial occupants— think restaurants and gyms that help foster a community for renters and homeowners—are in industries battered by the pandemic.
Not all major cities, however, are seeing these woes play out equally. While big retailers are closing stores across the nation, some cities like Seattle—which has a relatively low unemployment rate and was able to get the virus under control early on—have been recovering faster than others, propping up small businesses that rely on foot traffic. Moreover, not all metros attract mixed-use developments, which tend to favor dense urban pockets, where residents both work and live.
“Commercial tenancies have a much larger impact on residential buildings in real urban centers like San Francisco or New York or Washington DC or Chicago,” said Scott Gordon, senior vice president for Kennedy Wilson’s property services division in Los Angeles. “There, a very significant retail and dining presence on the lower floors has a much greater economic impact than perhaps in Los Angeles, which is obviously a lot more spread out.”
Commercial troubles in mixed-use developments usually undermine residential rent prices.
“If you have failed retail tenants in your mixed-use building, it makes the other components of the mixed-use building less desirable because those previous amenities are not there anymore,” Mr. Morris said. “That would tend to put downward pressure on the residential rents or the concessions or the terms that the landlord is getting to the multifamily apartments.”
That pressure can erode the residential rent premium that mixed-use developments often carry compared to the overall market. Depending on the location and the mixture of retail, the premium can be as high as 20%, studies show.
For instance, a Whole Foods supermarket alone can pump up rents by as much as 8.4%, according to a 2019 report by Newmark Knight Frank that analyzed the rent effects of seven grocers in Washington, D.C., Virginia and Maryland. And, this is for apartments located within a mile of the grocer. Units directly above a Whole Foods see even more pronounced prices, the report authors say. For mixed-use developments, retail-anchoring grocers contribute the highest rent premiums.
“Some people just like the convenience of being able to go to the grocery store and not have to step out or being able to run down if they forgot something for dinner,” said Lindsey Senn, executive vice president of finance and development with Chicago-headquartered real estate company Fifield. “Because of that, the loss of a grocer makes much more of an impact than, say, a restaurant closing when there’s another restaurant that’s down the block.”
Taking it a step further, the absence of a business, signaled by dark and boarded-up windows, might give scores of potential residential tenants a pause.
“When you are leasing an apartment, you are selling an experience,” said Mr. Gordon. “When you have an empty commercial space, it is about perception.”
Because of this, developers are now more scrupulous about the commercial tenants they sign on. Before the coronavirus outbreak, developer Joseph Kavana, chairman and CEO of Sunrise, Florida-based K Group Holdings, had been in talks with multiple restaurants he considered bringing to Metropica, a $1.5 billion, 65-acre community under construction in Broward County near Fort Lauderdale. The pandemic has changed the conversations.
“We have had discussions with a lot of different restaurant groups,” Mr. Kavana said. During the pandemic, “some of them have done better than others. Frankly, at this point, we believe that the best approach is to take a breathing moment and wait and see what develops after this.”
Despite the pandemic, Mr. Kavana hasn’t scrapped his intention to have eateries as well as offices in Metropica, banking on the idea that people will eventually return to both.
NYC Co-ops Can See A Direct Hit
One segment where shuttered retail has easy-to-measure financial implications for residential occupants is the New York City co-op market. When co-op buildings lease their ground floors to businesses, the generated revenue helps defray the monthly fees for the residential owners.
Earlier this year, Warburg real estate agent Christopher Totaro worked with the buyer of a 2,500-square-foot home in an eight-unit co-op in downtown Manhattan. The monthly co-op fee was about $1,000. Then, in April, before Totaro’s client purchased the unit, the business downstairs, an upscale furniture design shop that paid roughly $1 million in annual rent, moved out for a reason unrelated to the coronavirus. The departure pushed the co-op fee to $3,000, Mr. Totaro said.
“If you’ve got a business such as a restaurant that is shut down because of Covid or is not paying rent, the people that live upstairs may be paying to carry that restaurant through these times,” Mr. Totaro said.
Co-ops without hefty reserves to continue paying their mortgage and maintenance in the absence of commercial rent might have little choice but to increase their owners’ fees. After some consideration, Mr. Totaro’s client went through with the purchase.
“People, I think, don’t understand the magnitude of the ripple effect” of underperforming retail, Mr. Totaro said.
Blackstone Ready To Lend After Raising Record Property Debt Fund
Investment firm raises $8 billion as falling rates help increase appeal of relatively high-yielding real estate debt.
Blackstone Group Inc. closed this month on the largest real-estate debt fund ever, giving the investment firm plenty of cash to lend to property investors looking to go shopping during the coronavirus pandemic.
One of the world’s largest owners of commercial property, Blackstone began raising money for the fund in the spring of 2019 and the $8 billion it took in exceeded expectations, said Jonathan Pollack, global head of Blackstone Real Estate Debt Strategies. Fundraising got a boost after Covid-19, partly because interest rates fell, increasing the appeal of relatively high-yielding real estate debt.
“There’s an expectation that there will be a greater opportunity in real estate debt than there has been,” Mr. Pollack said in an interview.
The fund will make new loans and buy real-estate debt securities along with other investments. Blackstone’s real-estate debt business has grown to $26 billion of property debt assets under management, up from $10 billion five years ago. Overall, its global real-estate portfolio is valued at $329 billion.
Fundraising by private-equity firms has declined overall this year as the pandemic created enormous uncertainty and barriers to travel and other business practices especially in the early months. As of mid-September, private-equity funds had raised $81.5 billion compared with $142.9 billion during the same period last year, according to data firm Preqin.
But it is beginning to pick up. Other recent closings include a $950 million real-estate debt fund raised by KKR & Co. that is focusing on the most junior tranches of commercial mortgage-backed securities.
During the first few months of the pandemic “everybody regardless of lender class was assessing their own portfolio,” said D. Michael Van Konynenburg, president of Eastdil Secured LLC. “Once people got to July they felt they understood where their own portfolios are and started to ramp up and look for new deals.”
Much of the new capital raised is by firms planning to focus on distress properties. Billions of dollars of loans backed by malls and hotels are in default, according to data firm Trepp LLC. At the same time, many of the traditional lenders, like originators of commercial mortgage-backed securities, have put on the brakes. That is increasing the rates borrowers are willing to pay to lenders still in the game.
“New capital invested expects to earn greater returns,” said Mr. Pollack.
Blackstone’s debt funds—which have historically returned about 10% annually to investors—tend to avoid riskier debt deals. Much of its business involves making first mortgages to some of the world’s largest real-estate companies and investors.
For example, Blackstone might make a loan today to the buyer of a well-leased office building that was in contract to be sold before Covid-19 hit and the deal collapsed. “It’s going to get done today in much more uncertain capital markets,” Mr. Pollack said.
“Twelve months ago the guy buying the building would get 12 different term sheets from lenders of all stripes,” he said. Today fewer lenders will be able to give the buyers the certainty they need that they can close the deal “and they’ll pay more” for certainty, Mr. Pollack said.
Mr. Pollack said Blackstone’s debt portfolio hasn’t suffered many problems from loans it made before the pandemic. He said that is partly because Blackstone’s low risk loans are typically about 60% to 65% of the values of the properties.
“It also helps to be very selective about who you lend money to,” Mr. Pollack said. He pointed out that Blackstone’s borrowers have tended to be “well capitalized institutional investors that you would expect to hold on to [properties] through a period of dislocation.”
Landlords Challenge U.S. Eviction Ban And Continue To Oust Renters
A lawsuit backed by the National Apartment Association and other challenges aim to undo the national eviction moratorium ordered by the CDC.
In September, the Trump administration announced a national moratorium on evictions, via an order by the Centers for Disease Control and Prevention aimed at reducing the spread of coronavirus. The four-month temporary suspension applies to any tenant who can’t make rent due to economic conditions and who presents a written declaration about their circumstances to their landlord.
But the CDC ban now faces legal challenges on multiple fronts, even as landlords continue to routinely file evictions for nonpayment of rent — the very outcome that the order was designed to prevent.
On Oct. 20, the U.S. District Court for the Northern District of Georgia heard the first case against the moratorium, Richard Lee Brown, et al. v. Secretary Alex Azar, et al.. That challenge, brought by a nonprofit called the New Civil Liberties Alliance, has been joined by the National Apartment Association, which represents some 85,000 landlords responsible for 10 million rental units.
Lawyers and scholars working on behalf of plaintiffs in the cases say that the CDC lacks the constitutional authority to enact a policy affecting rents.
“This is a very sweeping measure,” says Ilya Somin, law professor at George Mason University. “It’s being done on the basis of laws and regulations that allow the CDC to adopt regulations to stop the spread of contagious disease across state lines. If these regulations are broad enough that they give the CDC the authority to adopt an eviction moratorium that applies to the entire country, then they’re broad enough to mandate or restrict almost any kind of activity.”
A decision for a preliminary injunction could be issued, or denied, within the next two weeks. That could throw open the door for landlords to pursue their claims in court before the moratorium expires at the end of the year.
Such a decision could trigger a surge in evictions: More than 6 million households missed their rent or mortgage payment in September, according to an analysis by the Mortgage Bankers Association. Recent surveys by the Census Bureau show that as many as 11 million people living in rental housing — 1 in 6 adult tenants — were late or behind on rent as of last month.
Other studies show that the ranks of people living in poverty have grown by some 8 million people after increases to the social safety net in the spring were allowed to lapse.
A separate suit brought by the Pacific Legal Foundation is still pending. One of the plaintiffs in that case, a landlord just outside New Orleans who was originally blocked from evicting a tenant by the CDC moratorium, dropped out of the challenge after she was able to pursue the eviction by a different means. Another challenge in Ohio faltered for a similar reason.
Tenant organizers point to these dropped cases as an illustration of the porousness of the federal moratorium. The policy has led some landlords to pursue nitpicking lease violations or punitive measures against tenants who are unable to pay rent — tenants who would otherwise enjoy protection under the CDC’s aegis if they went to court.
“It’s not a protection at all for many renters,” said Alana Greer, director and cofounder of the Community Justice Project, a Miami-based nonprofit, during a press conference earlier this month. “This week alone, we’ve had two clients whose electricity was shut off in their building after serving the CDC moratorium,” she said, referring to the declaration required under the order.
The previous federal eviction moratorium, which was authorized by Congress as part of the CARES Act and applied to a narrower subset of renters, expired in July. So did the $600-per-week federal boost to unemployment benefits that proved so critical to out-of-work renters. The first federal moratorium also faced several legal challenges; none of the suits succeeded.
It’s not just landlords pushing back against the eviction moratorium this time, however. The Texas Supreme Court issued an emergency order in September to clarify that landlords can still seek an eviction by challenging the declaration provided by tenants under the CDC order.
Jeremy Brown, a justice of the peace in Harris County, Texas — where thousands of Houston tenants have been evicted since the onset of the pandemic — says that most tenants don’t realize their rights and even fewer have the legal resources to successfully pursue them.
“Regardless of your crime, if you get arrested, there’s an obligation for that arresting agent to tell you that you have certain rights,” Brown says. “The right to counsel, the right to remain silent — that same obligation is not there for housing.”
And the CDC itself released an update on Oct. 9 indicating that landlords could still file eviction for nonpayment even if the cases could not be heard until the new year. Civil rights advocates say that this guidance effectively undoes the eviction ban, since so many tenants lose their eviction hearings by default by not showing up for the case once they receive an eviction notice.
“Why would a landlord want to start eviction proceedings in October for an eviction that can’t happen until January?” says Diane Yentel, president and CEO of the National Low Income Housing Coalition. “The answer: to pressure, scare or intimidate renters into leaving sooner.”
“If there wasn’t a pandemic going on, they wouldn’t be able to impose a moratorium.”
Attorneys for the plaintiffs point to a constitutional question: Congress cannot delegate to the executive branch what is effectively legislative authority, and the CDC order usurps this law-making power, they say. Conservatives and libertarians eager to curb the administrative state have used the non-delegation clause as an argument to some success.
Somin at Geoge Mason University points to Supreme Court Justice Elena Kagan’s argument in Gundy v. United States that there is a violation when “unguided and unchecked” authority is given to a federal agency or an executive branch official.
“If the CDC has the power to prevent virtually any activity simply by claiming that doing so might reduce the spread of contagious diseases, and they don’t even have to prove that it actually will, that is as ‘unguided and unchecked’ as anything that I can think of,” Somin says.
Steve Simpson, senior attorney for the Pacific Legal Foundation, says that in addition to the constitutional question, the CDC lacks the statutory authority to enact an eviction ban. The texts for the regulation (42 CFR § 70.2) and the underlying statute (42 USC § 264) both list fumigation, inspection and extermination among the available powers. The statute also authorizes “other measures” as deemed necessary.
“You can’t read a catch-all provision like that, especially when it has enumerated things the CDC can do, so broadly as to obviate the rest of the statute, to make it all pointless,” Simpson says. “Why bother enumerating things if they can basically do anything they want?”
Eric Dunn, director of litigation for the National Housing Law Project, a housing justice nonprofit, says that the plaintiffs have no grounds for the solution they’re seeking. Plaintiffs hope to see a preliminary junction that unfreezes evictions immediately, since the actual resolution of the case could last far longer than the moratorium itself.
When the injury in question is entirely economic in nature (and not irreparable harm”), courts by and large won’t issue a preliminary injunction. The injury in eviction challenges such as Brown v. Azar is exclusively economic, Dunn says.
Beyond that technical issue, Dunn says that emergency powers by definition explain the CDC’s statutory authority to take steps normally not available to the agency.
Experts dealing with communicable diseases need to be able to take action in order to prevent them from spreading when there’s not time to convene legislative bodies or committee hearings to write new laws — or when there’s no will to do so, as the present stalemate in the Senate has shown. “If there wasn’t a pandemic going on, they wouldn’t be able to impose a moratorium,” he says. “This is a pandemic.”
The public health risks associated with evictions have been modeled by Michael Levy, an epidemiologist at the University of Pennsylvania. His research — which was independent of these legal challenges to the CDC moratorium — focused on the potential effect of evictions on the spread of Covid-19.
When tenants are evicted, they often move in with other family members, increasing the size of households and the chance for viral transmission. Levy’s model predicts that a 1% eviction rate would result in a 5% to 10% higher incidence of infection, leading to approximately 1 death for every 60 evictions.
Housing advocates cite evidence like that to argue that the displacement of even a small fraction of the millions of renters at risk of eviction would inflict lasting damage on the economy, further spread the coronavirus, and bring unspeakable pain for families.
No matter what the courts decide, struggling tenants still face a potential catastrophe: With no further coronavirus aid likely coming before the November election, they’ll have to find a way to pay when the eviction moratorium expires and all the rent comes due immediately. That could happen later, on Dec. 31, or it could happen sooner.
And even under the moratorium, evictions for nonpayment still continue, albeit at a slower rate.
“We treat housing in this country as a commodity more so than a right,” says Brown, the justice in Houston. “Somebody in my court might have mold in their apartment. It may be uninhabitable. If they don’t pay rent, they still get evicted. The pandemic has highlighted these issues, not caused these issues.”
Hot Mortgage Market Is The Fed’s House of Cards
Many Americans have weathered the pandemic by refinancing their homes and benefiting from soaring property values. But what happens next?
When the definitive story is written about U.S. financial markets during the coronavirus pandemic of 2020, expect America’s housing market to play a starring role.
In many ways, it’s hard to reconcile worsening Covid-19 outbreaks with record-high levels for the Dow Jones Industrial Average and the S&P 500 Index, or the unprecedented surge in unemployment earlier this year with the fact that American households are by some measures in their best financial shape overall in decades, regardless of wealth level. It becomes a bit easier to see what’s happening when using the mortgage market as a frame of reference.
Benchmark 30-year mortgage rates have slowly but surely dropped to record lows throughout the pandemic, touching 2.78% earlier this month, according to Freddie Mac data. This has naturally encouraged more and more homeowners to refinance their mortgages, thereby allowing them to lower their monthly payments or tap equity.
With more cash in their pockets, these people have kept spending levels relatively steady while also socking money away or investing in stocks or other assets. Janet Yellen, the former Federal Reserve chair and contender to be President-elect Joe Biden’s Treasury secretary, said during the Bloomberg New Economy Forum on Monday that a “savings glut” was helping to prop up financial markets.
What she didn’t say, and what’s flown largely under the radar amid the central bank’s efforts to bolster the economy, is the Fed’s role in pushing the $6.8 trillion mortgage-backed securities market to extremes. I wrote last month that the Fed might resort to infinite quantitative easing to support the $20.4 trillion U.S. Treasury market. But if the central bank ever steps away from backstopping mortgage bonds, there’s reason to believe the consequences could be even more dire.
As it stands, the Fed has bought more than $1 trillion of mortgage bonds since March, a record pace, and now holds $2 trillion of the securities on its balance sheet. That easily eclipses the previous high during the last economic recovery.
Central bankers have pledged repeatedly to keep adding bonds each month “at least at the current pace,” which is often quoted as $40 billion. But that’s actually a net figure: Total monthly purchases tend to be closer to $100 billion because borrowers’ principal repayments take out some debt already on the Fed’s balance sheet.
In recent weeks, the Fed has taken its mortgage-bond buying even further. On Oct. 29, it took the unprecedented step of purchasing conventional 30-year securities with a 1.5% coupon, the lowest now available. Though it’s been careful not to go overboard, the move is nonetheless a clear indication that the central bank doesn’t expect to raise interest rates in the years to come.
All of this serves to squeeze mortgage-bond investors in higher-rate securities. Most of them bought the debt at a premium, and the constant reduction in lending rates leaves them vulnerable to prepayment risk as homeowners refinance and pay off their existing obligations at par. But it would be arguably even more painful if investors are herded into ultra-low coupon MBS, only to see rates rise.
Known as “extension risk,” fund managers left holding 1.5% or 2% MBS could be saddled with huge losses if longer-term interest rates start to increase next year as the U.S. economy rebounds and inflation starts to pick up on the back of a Covid-19 vaccine.
It should be clear by now that the Fed is in a tricky spot. On the one hand, pushing down long-term mortgage rates is one of the most direct ways the central bank can bolster household balance sheets. And yet the Fed desperately wants inflation above 2% and for the U.S. economy to bounce back.
If America indeed comes roaring back next year, longer-term Treasury yields should jump higher, as would the benchmark 30-year mortgage rate. But if that happens too quickly, and homeowners can no longer free up cash, that removes a key pillar of support for the economic recovery.
JPMorgan Chase & Co. may have a temporary answer for the Fed’s dilemma. Michael Feroli, the bank’s chief U.S. economist, predicted on Monday that the Fed will announce at its December meeting that it will tilt its bond buying toward longer-dated Treasuries, potentially doubling the weighted average maturity of its $80 billion of purchases. This would presumably pin down 10-year and 30-year yields, and, by extension, mortgage rates, even with the economy on the mend.
Fed Vice Chair Richard Clarida on Monday indicated that policy makers are still monitoring asset purchases, though he gave no indication they were leaning in the direction of extending maturities. Still, it’s the logical next step, in the same vein as Operation Twist.
Regardless of whether policy makers go that route, it’s hard to see a way out of the mortgage market for the Fed without causing at least a hiccup in the U.S. housing market and an implosion at worst.
As my Bloomberg Opinion colleague Aaron Brown wrote last week, even though U.S. home prices are nearing all-time highs, the current market isn’t necessarily a disaster in the making because the high valuations are the result of rock-bottom interest rates. However, as he made clear: “It’s one thing to be a peak valuation, it’s another to be at peak valuation with no discernible upside.”
If there’s a modest correction in housing prices, that shouldn’t be too disruptive for the economy as a whole. Rather, it’s the second-order effects of higher mortgage rates that should concern investors. As Bloomberg News’s Christopher Maloney reported, aggregate Fannie Mae 30-year prepayment speeds in September increased to their fastest since April 2004, and Wall Street analysts expect that the current “perfect refinance environment” can last awhile longer.
If that doesn’t happen, for whatever reason, it would remove a crucial variable behind sustained consumer spending and the rally across risky assets.
As the calendar turns to 2021, Fed officials will need to figure out how to engineer a soft landing for the housing market. The refinancing boom the central bank engineered has helped countless Americans get through the pandemic. But it can’t afford to see it go bust. Most likely, the Fed won’t be able to extricate itself from buying mortgage bonds for at least the next several years, and possibly longer, or else risk toppling the entire house of cards it built.
U.S. Homebuyers Put Up Biggest Down Payments In 20 Years
Homebuyers, facing tightening credit standards and skyrocketing prices, are putting up the biggest down payments in at least two decades.
The median down payment for single-family homes and condos in the U.S. was $20,775 in the third quarter, the most in records going back to 2000, according to a report from Attom Data Solutions. That’s up 69% from $12,325 a year earlier, before record low mortgage rates kicked the housing boom into a higher gear.
Borrowers put up 6.6% of the median sale price of homes financed in the quarter, up from 4.7% a year earlier and the highest level since 2018. The median loan amount in the quarter of $275,500 was the highest since 2000, up 24% from the third quarter of last year.
”Down payments are rising at a time when lenders are tightening their guidelines,” said Todd Teta, chief product officer at ATTOM Data Solutions. “Lenders have grown more cautious in order to protect themselves from more delinquencies.”
Mortgage companies are raking in cash in the midst of the pandemic, earning hefty margins while consumers flood in to buy homes or refinance existing loans to take advantage of record-low mortgage rates. The average for a 30-year, fixed loan tumbled to 2.72% this week, the lowest in data going back almost 50 years, Freddie Mac said Thursday.
It’s no wonder that lenders have gotten more picky than they have been in decades.
Lenders including JPMorgan Chase & Co. have tightened terms for borrowers amid widespread worry about future economic growth. JPMorgan, for instance, told loan officers earlier this month that it would limit jumbo loans to 70% of the sale price for most co-ops and condominiums in Manhattan.
The typical borrower last quarter had a 786 credit score, the highest median score in quarterly figures dating to 1999, according to data maintained by the Federal Reserve Bank of New York.
The $1.05 trillion of home mortgages originated last quarter was the highest since 2003, New York Fed data show, when homeowners across the country were taking advantage of a previous historic refinancing boom.
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