Coronavirus: US bracing for 'biggest wave' of mortgage delinquencies in history, as shadow of 2008 looms

Lockdowns across the country in response to COVID-19 are impacting businesses and pushing many borrowers out of employment

                            Coronavirus: US bracing for 'biggest wave' of mortgage delinquencies in history, as shadow of 2008 looms
(Getty Images)

The COVID-19 pandemic has not just given health experts a shock of their lives but also the pundits of economics.

The world is already feeling the pinch of recession as the pandemic has brought the global economy to a grinding halt. Comparisons, justifiably, have come up regularly with the 2008 financial crisis.

However, while the recession that happened 12 years ago saw an excessive subprime debt that sent home prices going through the roof before they crashed, hitting an entire generation of homebuyers, 2020 has seen the housing sector facing a more conventional challenge.

The problem with the housing sector this time is “a sudden and unpredictable inability of mortgage borrowers to make their scheduled monthly payments” as the economy has screeched to a stop because of the pandemic that has affected nearly 1.1 million people globally and killing almost 59,000, according to a report in Zero Hedge.

The report cited a Bloomberg report to forecast that the crisis will be even worse this time. Bloomberg reported that the mortgage lenders are bracing for the biggest wave of delinquencies in history. It has been cautioned that if the plan to buy time doesn’t work and the Treasury’s plan to extend liquidity to the country’s small businesses faces a possible collapse, massive crisis in the form of “mass foreclosures and mortgage mayhem” could be not far from reality.

It has already been reported that the US has seen loss of 10 million jobs in the last two weeks and this could see the borrowers running out of income seeking relief from payments for as many as three months at a time on federally backed mortgages. They could also seek avoiding penalties and denting of their credit scores. But Bloomberg has reported that this is not a “payment holiday” and the homebuyers will have to make it all up eventually.

Mark Zandi, the chief economist at Moody’s Analytics, has estimated that as high as 30 percent of Americans having home loans could stop paying if the country’s economy remains shut for the entire summer or even beyond that. The percentage translates into 15 million households. 

Maria Smith waits for the few customers to stop by her cigar stand as the city government takes steps to fight the coronavirus outbreak on March 25, 2020 in Key West, Florida. The pandemic has severely hurt the American economy and small businesses are fighting for survival. (Getty Images)

Susan Wachter, a professor of real estate and finance at Pennsylvania’s Wharton School of University, called the event “unprecedented”, Bloomberg added. She also said while the 2008 crisis happened over a number of years, the current one has happened in some months and weeks. 

Lenders are in dark

Meanwhile, lenders are working in the dark with no way of predicting how long will the pandemic last and to what extent it will hurt the economy. If the pandemic dies down soon and the economy is restored, the borrowers will be back on the track but an uncertain duration of the fallout could lead to a huge damage.

“Nobody has any sense of how long this might last,” said Andrew Jakabovics, a former policy adviser at the Department of Housing and Urban Development and currently working at Enterprise Community Partners, a nonprofit affordable housing group, was quoted as saying by Bloomberg. “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,” he added.

A long-lasting economic collapse will see the government going for preventing foreclosures and that could mean forgiving some debt, Tendayi Kapfidze, chief economist at LendingTree, said. He also cautioned that since the government is trying to bail out everyone now, the risk of allowing foreclosures to rise will be too high and that would damage the financial markets.

“I expect policy makers to do whatever they can to hold the line on a financial crisis,” Kapfidze said.

According to the economic relief package passed by the Congress last week, the borrowers must ask help from their lenders and avoid black marks on their credit reports. 

“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,” the Bloomberg report added.