Will Coronavirus Lead to a Mortgage Meltdown?
In the week ending April 4, 6.6 million Americans applied for unemployment benefits as coronavirus continues to shatter the U.S. labor market. Does this mean that the national economy is headed toward a complete 2008 recessionary-type mortgage meltdown? Even the CEO of JPMorgan, Jamie Dimon, wrote to shareholders on April 6 that the coronavirus pandemic will cause, “a bad recession combined with some kind of financial stress similar to the global financial crisis of 2008.”
Two figures can help illuminate coronavirus’ effect on the housing market: mortgage delinquency rates and unemployment.
Just prior to the steep ramp-up of the coronavirus pandemic in the U.S., on February 11, 2020, the Mortgage Bankers Association (MBA) released its National Delinquency Survey, which signaled that mortgage delinquencies were at a healthy all-time low since 1979. The delinquency rate for mortgage loans on one-to-four unit residency properties was a robust 3.77% and the “foreclosure inventory rate” — the percentage of loans in the foreclosure process — was at its lowest level since 1985.
The same graph tracking mortgage delinquency rates reported by the MBA also traces unemployment rate, sourced from the U.S. Bureau of Labor Statistics, which peaked twice in 1981–83 and 2008–10. These were recessionary periods when nationwide unemployment skyrocketed to levels of 10%.
Taking both of these figures into account, the United States had recovered well since the 2008 crisis and reached a healthy 3.5% unemployment rate and 3.77% mortgage delinquency rate, signaling a terrific start to 2020.
Factors Leading Up to the Housing Crisis in 2008 Versus a Coronavirus-Driven Recession in 2020
The biggest difference between the 2008 housing crisis and today’s coronavirus-driven recession are the factors leading up to both events. In the early 2000s, banks significantly expanded their mortgage lending practices. They also began repackaging risky loans into securitized assets (i.e. mortgage-backed loans), which were then levered and sold throughout Wall Street. As home asset prices ballooned and the spread between market and fundamental prices widened, the Federal Reserve enacted interest rate hikes in the mid-2000s which burst the bubble and immediately caused the real estate market to stall, ultimately tipping the system into the 2008 financial crisis.
As the situation develops, we should watch how swiftly bankruptcies and unemployment will sweep the country, as a result of coronavirus. As countermeasures to a mortgage meltdown, government-sponsored mortgage companies (Fannie Mae and Freddie Mac), states (e.g. California, New York, Texas), and swaths of credit unions and banks (JP Morgan Chase, Citi, US Bank, Wells Fargo) have all placed temporary suspensions on foreclosures and foreclosure-related evictions, ranging between 60 and 90 days to indefinite periods.
Prior to 2008, the Federal Reserve had attempted to contain the housing bubble by increasing interest rates. Now, the Federal Reserve is focused on keeping interest rates low in the foreseeable future to soften the blow of a looming recession, as witnessed by the Federal Reserve’s recent cut of its federal funds rate to 0% on March 15. The Federal Reserve may even contemplate going into a negative interest rate territory. In essence, the mortgage market will face little headwind in today’s economic environment. Combined with the governmental and private company forbearance measures, mortgage delinquencies will likely not produce the amount of foreclosures observed in the subprime mortgage crisis. In the immediate future, we can anticipate that because public courts are not in session, foreclosures will be forestalled and eviction rates may temporarily decrease, before an uptick in delinquencies emerge.
Instead, the Speed and Duration of Unemployment is Paramount to Understanding the Extent of a Coronavirus-Induced Recession
The figure we should be most wary of is unemployment — its pervasiveness and the rate at which it will spike. According to the Federal Reserve Bank of St. Louis, the coronavirus outbreak could directly lead to 47.05 million Americans losing their jobs in the second quarter of 2020. This would lead to a staggering 32.1% unemployment rate, an unprecedented figure that would completely eclipse the Great Depression’s 24.9% unemployment rate and the 10–11% unemployment ranges of the early 1980s and 2008 recessions.
Fears of a mortgage crunch should be mitigated given that stricter lending practices are now in place via the 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act, eliminating certain sub-prime borrowing risks that existed leading up to the 2008 housing crisis. However, a coronavirus-induced recession may be just as, if not more, pronounced than the 2008 crisis if a 30%+ unemployment figure is truly reached over a sustained duration of time.
Immediate stimulus programs such as the Congress’ Cares Act, Ginnie Mae’s imminent liquidity facility for mortgage forbearance, the Department of Treasury’s $349 billion emergency small business relief loans, the Federal Reserve’s $700bn quantitative easing plan, and the $2 trillion stimulus bill all aim to keep credit markets functioning, inject money into the economy, enable consumers to spend and borrow, and keep businesses afloat. Thus, as the coronavirus pandemic rages on, the economic consequences will depend on how quickly relief is provided to families and how players on the frontline will control the pandemic. These will directly influence the extent and duration of a dreaded peak in unemployment rates, and consequently the nature of the nation’s recovery.
