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Exploring the Impact of COVID-19 on Mortgage Delinquency

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Every recession is different, and the 2007-2008 Great Recession, driven by a collapse in home prices, was no exception. The current economic situation, though, is completely different, and the impact of COVID-19 on mortgage delinquency is a tricky thing to predict.

2008 Vs. 2020

First, consider what happened in 2008. Leading up to the crisis, there was such a demand for mortgage-backed securities that banks issued far riskier mortgages than they should have. Once those risks stopped paying off, the bills that came due couldn't be paid, and that cascaded throughout the system.

2020 is, essentially, large chunks of the economy simply stopping. While roughly a third of the workforce has the option to work from home, the rest don't. Adding to the trouble, non-essential industries like entertainment have been hard-hit with layoffs. Since 64 percent of Americans own a home, some mortgages are bound to be impacted, but how many is hard to figure.

Adding to the issue, from a financial perspective, is federal and state mortgage forbearance and a halt to most eviction proceedings. This prevents the spread of the virus, since homelessness is a major risk factor for spreading any disease, and this needs to be the top priority. However, it has the potential for a rolling delinquency crisis.

Short-Term Scramble, Long-Term Chaos

Short-term, mortgage servicers are stuck in the middle. Servicers generally buy loans from lenders and handle the day-to-day operations, so a suspension in mortgage payments cuts off their cash flow. As of this writing, there appears to be no real effort to bail out servicers. This will mean a scramble to stay in business, and some won't make it.

Roughly five percent of mortgage holders have asked for some form of forbearance so far, but applications are rapidly rising. There will likely be more as people tap into savings, pick up “essential” work to make ends meet, and take other actions. Estimates are that up to a quarter of all mortgages may need forbearance.

Add to this the servicer failures, the attendant debt sales, and the likelihood of deceased mortgage holders, and you have murky waters. Some are concerned about potential "balloon" payments forcing unemployed and underemployed homeowners out of their properties. Others wonder about the impact of probate on delinquencies.

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To predict the impact on mortgage delinquency, you'll need to monitor several factors:

  • How many mortgages go into forbearance, and where: Areas hardest hit by the economic shutdown will likely have more delinquencies, simply due to raw numbers.
  • Which servicers go out of business, and who buys their debt: Depending on methods of collection, such as balloon payments, delinquencies may spike.
  • Unemployment after the economy starts again: It's not clear yet how persistent the current levels of unemployment will be, but unemployment and mortgage delinquencies tend to be linked. Higher unemployment leads to more delinquency.
  • Outside Factors: Keep in mind that all of this assumes there will be no bailout of servicers and no relief for mortgage holders. That may change as the crisis deepens or political shifts occur. It may also vary from state to state. States with strong homeowner and tenant protections will likely see fewer delinquencies.

Finally, remember that the downstream impacts of this will likely take years to play out. It's not clear yet how many people will be able to come back to work, whether they'll have jobs to come back to, and the overall impact on the economy. Those are effects that only time will reveal.