The coming wave of defaults

With COVID-related income supplements and unemployment benefits now expired or reduced, we face a new wave of mortgage and rental delinquencies, many of which will come in the next few months.

According to the Mortgage Bankers Association, as of June 30, mortgage delinquency in the U.S. had reached 8.2 percent, the highest since 2011 and almost double the 4.5 percent of a year earlier. With 53 million mortgages in the U.S., that means more than 4.3 million mortgages are delinquent. Add to that the fact that, per Black Knight mortgage analytics, almost 5 million homes have been in forbearance. With that, I estimate that at least 1 million to 2 million more of these loans will fall delinquent before the end of this year.

As for renters, the U.S. Census Bureau reports that, as of July, 18 percent were delinquent in their rent payments. That compares with less than 7 percent in prior years. With more than 43 million renters, that means more than 7.4 million are behind on their rental payments. With the loss of income and unemployment support, it is reasonable to believe that number will increase by several million over the next few months.

Many of the resulting evictions that normally would have occurred have been forestalled by government mandate, and a major portion of the mortgage payments and apartment rental payments that would have been late have been staved off by the lifeline of the $1,200 checks from the CARES Act and augmented unemployment benefits. Since this assistance has now expired, a new wave of delinquency is before us, and millions more Americans could go delinquent in the months immediately ahead.

When people go delinquent on their mortgage or rent because of COVID-based job loss or income reduction, their lives often become a proverbial hell. Many resort to bankruptcy as a refuge. But that is just the start of what is a chain of impairment. For renters, their landlords are then hurt because of those missed rent payments, and so they in turn go into default on the loans they took out to buy the rental property, something felt especially by the small landlords who have little clout with their lenders. Then the lenders themselves — those that made mortgage loans to households and those that made property acquisition loans to the small landlords — suffer loss.

This all comes because the individuals who make up the first link in that chain can’t pay, often just temporarily. All can be protected — at least over the near term — by continued government support such as proposed in the HEROES Act now being debated in Congress. With that, individuals would be able to pay their rent and mortgages, and thus small landlords would be able to pay their loans, and community lenders could avoid major losses.

Additional congressional support would give these Americans the lifeline of time. In economics, time is the most important commodity other than money itself. Time for their businesses to get back on their metaphorical feet. Time for these people to find new jobs. Time to cope. Time to heal.

The pandemic has been crippling to many, but it would have been far worse if not for the decisive actions of the Federal Reserve and the CARES Act passed by Congress. But additional congressional action is needed to prevent a recurrence of economic damage.

The Federal Reserve, by its dramatic support of the credit markets, has given crucial support to the assets primarily owned by the wealthiest Americans. It has kept the well-off very well-off. The reluctance of Congress to enact additional aid would seem to convey an unwillingness to provide the support most needed by average working Americans.

We need to give these Americans the lifeline of time.

Richard Vague is Pennsylvania’s acting secretary of banking and securities. He previously was a managing partner of Gabriel Investments, based in Philadelphia, and co-founder and CEO of Energy Plus, Juniper Financial and First USA Bank. He is the author of “A Brief History of Doom” (2019), which analyzed the world’s largest financial crises of the past 200 years, and “The Next Economic Disaster” (2014), which offered a new approach for predicting and preventing financial crises. The opinions expressed here are his own.