The Coming Wave of Defaults
The comments below are an edited and abridged synopsis of an article by Richard Vague
With Covid-related income supplements and unemployment benefits expired or reduced in the US, it faces a new wave of mortgage and rental delinquencies, many of which will come in the next few months.
As of June 30, mortgage delinquency in the US had reached 8.2%, the highest since 2011 and almost double the 4.5% of 2019. With 53 million mortgages, more than 4.3 million are delinquent. Almost 5 million homes are in forbearance. At least 1 million to 2 million more of these loans will become delinquent before year end.
As for US renters, as of July, 18% were delinquent in their rent payments. That compares with less than 7% in prior years. With more than 43 million US renters, more than 7.4 million are behind on their rental payments. With the loss of income and unemployment support, that number will likely increase by several million over the coming months.
Many of the evictions that normally would have occurred have been forestalled by government mandate, and a major portion of the mortgage/rental payments that would have been late have been staved off by the $1,200 cheques from the CARES Act and augmented unemployment benefits. These have now expired, and a new wave of delinquency awaits.
When people can’t pay their rent/mortgage because of Covid-based job loss or income reduction, their lives often fall apart. Many go bankrupt. Landlords are hurt because of missed rent payments, and so they go into default on the loans they took out to buy the rental property. Then the lenders suffer losses.
These people can be protected by continued government support as proposed in the HEROES Act. With that, individuals could pay their rent/mortgages, landlords could pay their loans, and community lenders could avoid major losses.
Additional congressional support would give these Americans the lifeline of time. The Fed has given 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 conveys an unwillingness to provide the support most needed by average working Americans.
