Written by Andrew Szalay, Habitat executive director
Over the last two weeks, I have been hosting web-meetings with some of our funding partners to share how Lancaster Lebanon Habitat for Humanity is responding to today’s challenges. Some of the partners’ questions raised issues that were bigger than Habitat alone and was really about how today’s events were impacting housing at large. Let me break it down and let you know what the next intersections might mean for renters, homeowners, and those of you looking to buy a new home.
There are two forces in action. The primary event is the COVID-19 pandemic, which, of course, is a public health emergency. The secondary event is the economic disruption brought on by business closures in order to prevent the disease from spreading uncontrollably. This hierarchy is important to be mindful about in understanding the crisis because that is what distinguishes it from the mortgage foreclosure crisis that preceded the Great Recession of 2008.
The economic disruption has been caused by the containment effort. And that has had the unintended consequence of slowing and even stopping, commerce, laying off employees, and reducing household income. And this is where it becomes a general housing challenge, for renters, homeowners and homebuyers. (rather than “however, the situation is different for renters, homeowners, and homebuyers.) In general, without income, rent cannot be paid and mortgages cannot be paid. And for homebuyers, there is both danger and opportunity.
For tenants and homeowners with a mortgage, what are they supposed to do with reduced or no income? This is assuming that there is no reserve savings; most Americans don’t have adequate cash reserves. These reserves, if you have them, should be put to use, particularly for housing costs, nutrition, and necessary clothing.
Various government entities, including Pennsylvania’s highest court, have issued a prohibition of tenant evictions for the month of April, and the majority of mortgage lenders (actually the mortgage owner/investor and its mortgage servicer, to be precise) are able to pause the collection of monthly payments (forbearance) for two-to-three months. Tenants and homeowners should be straightforward with their landlord and lender, respectively, about their financial situation; do not just skip the payment without communicating any update.
However, there is a hitch. For tenants and homeowners with a mortgage, the money that was paused becomes due in full (which is a balloon payment) at the end of whatever term was arranged. So if you told your landlord that you cannot make a payment for two months, then two month’s rent will be due on the third month. Same idea applies with a mortgage payment. Most landlords will need the payment in full, otherwise eviction could be pursued; the owner relies on the income to cover costs, including taxes and insurance, which cannot be deferred.
For homeowners, the mortgage servicer will enforce the agreement to repay (formally known as the mortgage note) and manage the escrow account, if there is one. Most mortgage servicers will advance taxes and insurance for up to four months even if there are no payments, which is generous. However, while a lender can defer principal payments, the escrow payments cannot wait because the property and school taxes must be paid on schedule, or else the government can start claims and urge foreclosure to start.
Homebuyers have had the ground shift underneath them, whether they noticed it or not. In some states, real estate businesses continue uninterrupted, and homes are being bought and sold. However, qualifying homebuyers and even refinances, are being scrutinized by higher credit score requirements and requiring 20 percent minimum downpayments for home purchases by many financial institutions as they are conserving their cash and reducing their risk in a volatile market.
Pausing evictions and providing mortgage forbearance is helpful relief to help everyone stay in their home, but will it be enough? The answer to that question primarily rests with how long the economic effects of the pandemic lasts.
For renters, it will depend on the willingness and ability of the landlord to be patient for rent payments. If the landlord owes a mortgage on the property, forbearance should be able to help them too. Mortgage forbearance is not just for owner-occupied homes and can work in concert to help prevent, or at least postpone, the likelihood of eviction.
For homeowners, it will depend on how long the lender can advance taxes and escrow and whether the homeowner can start making payments again. In forbearance, most mortgage servicers will offer the option to pay an interest-only payment or an escrow-only payment, with the interest-only payment being about $100 per month, depending on your loan. Both will help you stay in the home longer, but making an escrow payment — even for a few months — will postpone the four-month advance of payments.
Lancaster Lebanon Habitat for Humanity is a mortgage lender too. We have built 250 homes and have 91 mortgages still in repayment. We also are very interested in tenant issues because our Habitat homebuyers are renters and first-time homebuyers. For these reasons we are supporting our Habitat homeowners with forbearance and advancing property taxes and hazard insurance on their behalf. We are also seeking resources to provide temporary relief for our homebuyers. You can learn more about our Home Resiliency Fund to alleviate these payment challenges by clicking on our post here.