One of the biggest fears related to the pandemic’s economic fallout is the looming eventuality of mass mortgage defaults once forbearance ends. Eventually, the debt will come due -- and even if there is talk of partial loan forgiveness, this wouldn’t be a solution for lenders. However, a lot of people are in no better position to deal with several outstanding months of mortgage payments now than they were back in May. Whether it's due to extended unemployment, medical expenses, or a no-longer-feasible housing situation, hundreds of thousands of people will have to decide whether they should just walk away from their mortgages. The question is, will COVID-19 relief measures actually increase this?
Why and how could 'relief' make the situation worse?
The notion sounds ridiculous, until you look at it in the context of most lenders’ worst nightmare: the strategic default. This is when people who might be able to pay a mortgage choose not to, saving the money for several months to put toward their next life decision (and living space) instead. Many lenders are wondering just how many of their borrowers have already decided to make that move and are simply biding time and saving money for as long as possible before walking away.
Is this a reasonable fear? The general opinion: It depends on how further COVID-19 relief measures are structured. Obviously, this is a desperate strategy most people would not take in normal circumstances. Home is more than just a structure. It’s where your family is safe. It’s where you build your life. Lenders felt confident pre-pandemic that people would do just about anything to keep their primary homes if possible. And this is likely still true for most people.
Where is it more likely?
There are exceptions -- certain circumstances where we are seeing how different states’ decisions create a perfect storm for walkaways. The New York-to-Florida exodus is one example. Many Northeastern residents were weighing a move to Florida already, and no longer having to work in Manhattan every day simply expedited their timeline. For those who chafed at New York’s tight regulations, Florida governor Ron DeSantis's hands-off approach to health and safety measures was very appealing. And then, Governor Cuomo extended the moratorium on residential evictions and foreclosure proceedings till May 2021.
What does this mean in the worst-case scenario for New York landlords and lenders? It means that conceivably, New Yorkers who do have some income (or unemployment) are saving it up to grab a home in Florida rather than behaving in good faith toward their existing responsibilities. We don’t know how often this is happening already, but the housing market in South Florida is booming, with single-family home sales up by a reported 25% and median prices for South Florida homes overvalued, according to some real estate economists, by about 20%.
Are people really planning to turn their backs on New York, drop their keys in the mail, and never return? It is impossible to know. It depends on multiple factors, including when people begin to feel safe in crowds again and whether employers in America’s corporate capital eventually demand a return to the office.
The bigger picture
Nationally, it may depend on the federal government; namely, how cleverly it can structure future relief measures so as to reintroduce debt-related responsibilities in balance with people’s ability to pay them. Small business owners, teachers, and even nonessential medical workers have been sidelined for so long, it’s not realistic to think they could return to their pre-pandemic lifestyle and responsibilities immediately following a vaccine rollout. Certainly it is not realistic to expect them to shoulder a year’s worth of back debt after a year of no work. However, it’s realistic that most will want to stay in their homes and get back to their "regular" lives -- monthly mortgage payments included -- as soon as circumstances permit.