Will Mortgage Borrowers in the US Be Offered a Virus-Induced “Mortgage Holiday?”
(Should Borrowers Take it Even If They Don’t Need It?)

March 22, 2020 

The likelihood that a mortgage holiday will be adopted is high. The UK and Italy have already adopted such plans, and with the pandemic bound to get worse before it gets better, pressures for mortgage relief will grow.

What has been Interesting to me is that my mail on the subject has not been from borrowers in imminent danger of default. Rather, it comes from those who are not in immediate danger but might nevertheless find it to their advantage to participate in such a program when it becomes available. That is a more challenging question that    requires information on exactly how the plan will work. Since we don’t know that, I will discuss three possible models and their implications for borrowers who might or might not find it advantageous to participate.

Payment Subsidy: In this model, the payment is made by a third party, which would be either the lender or the Federal Government. In the US, it will not be the lender because in most cases lenders only service loans that they had sold for placement in mortgage-backed securities. Imposing a mandatory subsidy on Investors in mortgage-backed securities would be grossly unfair to them, and extraordinarily disruptive to that market.

The only feasible source of payment subsidies is the Federal Government. Since it would be advantageous for every borrower to participate, whether they needed it or not, the Government would be forced to adopt detailed eligibility rules that would take many months to implement.

Bottom line, payment subsidies are a bad idea, no matter who pays them.

Mortgage Freeze: This approach freezes the status of a participant’s mortgage as of a current date, for a period of N months.  When the freeze ends, the borrower starts paying again as if no time had elapsed. The payoff date is pushed forward by N months, but everything else stays the same.

Unlike a payment subsidy, borrowers will have little incentive to participate except for the dubious freedom of being able to procrastinate without cost. There is no need for extensive eligibility rules. Mortgage-backed securities would remain a problem but it should be manageable.

Payment Forbearance With Interest Accrual: With this approach, borrowers are allowed to skip the payment for a specified period without incurring late charges or delinquency reports, but interest accrues on their mortgage balance. When the forbearance period ends and they begin paying again, either the term will be extended from what it had been, or they will need to raise the payment to pay off on the original schedule.

This is the method that has long been used by mortgage servicers in dealing with delinquent borrowers. To borrowers, this is the least attractive option. But it is the least costly option to the lender, and imposes the least disruption to the mortgage-backed securities market.

Prediction: The Federal Government will mandate a program of payment forbearance with interest accrual, good for 3 months but extensible to 6 months.

March 21, 2020 Postscript:
I have been criticized, with some justification, for not indicating a preference among the three approaches I described, so here it is. I would select a mortgage freeze, which would leave borrowers unscathed and impose the major cost on lenders and investors. They are better positioned to survive it than borrowers or taxpayers.

March 28, 2020 Postscript: More recently, I have seen statements on the mortgage holiday from the governor of California, directed to mortgage lenders operating in that state, and from Fannie Mae, directed to all firms that service loans guaranteed or owned by Fannie Mae. In both cases, while neither is explicit, it is clear that the mortgage holiday applies to payments only, and that interest will continue to accrue. 

In both cases, however, borrowers in serious trouble can “request additional help, as practicable, upon showing of hardship due to COVID-19.” In sum, the burden of proof is on the borrower to make their case for support beyond a recess in mortgage payments. And it is up the individual loan servicer to decide whether the case is compelling enough to grant.

In sum, borrowers who can make their payments should do so, because the system makes it impossible for borrowers to profit from the pandemic.


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