Almost 33% of Canadian households rent their homes. Who is going to help them in the coronavirus crisis?
Haider-Moranis
The Vancouver Sun
Governments and businesses all over are adapting fast to the restrictions imposed to cope with COVID-19. The ensuing economic slowdown is going to affect cashflows of workers whose jobs are, or will soon be, interrupted. Businesses, such as restaurants, also face imminent financial challenges as sales have plummeted.
The Canadian government has responded with a sizeable stimulus plan of $82 billion including $27 billion in direct support and the rest in tax deferrals. The government has announced plans to purchase up to $50 billion of insured mortgage pools, a move to provide liquidity to the banks. Also, the big six Canadian banks have stepped up with plans for mortgage payment deferrals for up to six months to help homeowners who may experience sudden job loss or are furloughed for an indefinite period.
But will these steps be enough? Will renters, comprising almost 33 per cent of Canadian households, receive comparable relief in similar instances of financial hardships?
To support the real estate sector, it is likely that a range of interventions will be needed with mortgage-loan forbearance, a moratorium on rental evictions and a tax holiday from property taxes being among the options.
The response should also be broad and include renter households and others, such as small businesses, who may face additional hardships with rent or refinancing of their commercial mortgages.
Recent examples from the U.S. may help regulators devise strategies to cope with the unexpected slowdown. In 2011, for instance, the Obama administration adjusted the Federal Housing Administration (FHA) conditions to compel mortgage servicers to extend the forbearance duration from three months to 12 months.
The change in regulation was devised to help homeowners stay in their homes as they search for new employment. Former secretary of U.S. Housing and Urban Development Shaun Donavan said in 2011 that 45 per cent of unemployed Americans had been out of work for more than six months. Hence, the need for a longer-duration mortgage relief.
The forbearance program for unemployed American homeowners was set to expire in August 2013. However, the FHA extended the program indefinitely in July of the same year.
Forbearance on its own might not be a sufficient response. The U.S. government in 2010 had announced a US$7.6 billion Hardest Hit Fund and a US$ 1 billion Emergency Homeowner Loan Program in addition to the loan forbearance requirements that were announced a year later. Also, the Home Affordable Modification Program (HAMP), launched in 2009, reduced the monthly payments of struggling borrowers to 31 per cent of the borrower’s current monthly income.
Research by Sumit Agarwal of the National University of Singapore and others found that HAMP “prevented a substantial number of foreclosures.” It was also associated with a lower rate of “consumer debt delinquencies, house price declines, and an increase in durable spending.”
The authors, though, observed that the program reached only one-third of the targeted households. The extensive screening of qualifying borrowers slowed the pace of the program. The authors recommended that for future implementation, the trade-off between stringent scrutiny and the ability to provide quick relief to many distressed borrowers be viewed with care.
Extending forbearance duration comes at a cost. Whereas the delayed mortgage payments and forgone interest can be added to the owed principal, there are other financial costs to consider. For instance, qualifying the deserving borrowers and monitoring their legitimate attempts for reemployment will impose additional implementation costs on lenders who would then need support from the government to bear additional costs.
The mortgage payment relief should not be restricted to the homeowners’ primary residence in case they have rental investment properties. If a renter becomes unemployed and stops paying the rent, private landlords will face hardship servicing the mortgage for investment properties. Hence, qualifying for mortgage payment relief must be tied to the employment status of the resident of a dwelling and not necessarily its owner.
At the same time, the relief must be extended to renters whose finances are often more fragile than homeowners, who, in time of need, can borrow from home equity. A moratorium on renter evictions for 12 months or more is needed to provide shelter security to the vulnerable renter households.
Small businesses, such as restaurants or private gyms, are likely to bear the brunt of social distancing. Business owners will experience immediate declines in cashflow, limiting their ability to pay rent or mortgage on their commercial properties. Extending mortgage payment or rent relief to small businesses will be equally important.
The federal government has stepped up with a sizeable financial package to help Canadians cope with COVID-19. Additional legislation may be needed to stay all collections, evictions, and protecting the credit history of those who may default as a result.
For financial institutions, the choice is between foreclosures and forbearance. The American experience suggests that housing foreclosures impose larger costs on banks, borrowers and the broader economy than the costs associated with loan forbearance, which allows homeowners the prolonged security of shelter as they search for gainful employment.
By choosing forbearance over foreclosures, Canadian Banks have made the right choice. Extending the grace period to 12 months or more, if needed, will also be a prudent response to COVID-19.
© 2020 Financial Post
