The government’s mortgage forbearance policies exclude 61% of Americans

The most overlooked cataclysm from the COVID-19 pandemic is the coming crunch on America’s low-income homeowners and renters. The families most in need may be facing biggest wave of evictions and foreclosures since the Great Recession.

Reading the headlines, you’d think the U.S. is doing a great job supporting Americans struggling to make their rent and mortgage payments. Indeed, as the pandemic was obliterating 30 million jobs starting in early March, virtually every federal agency that provides housing or backstops home loans unveiled widely lauded forbearance programs that allow tenants and borrowers to forgo payments for a extended periods targeted to carry them through to the recovery.

The government’s approach to housing relief, however, suffers from a basic weakness. It helps only the households holding mortgages backed by federal government sponsored enterprises and federal agencies such as Fannie Mae, Freddie Mac, and the FHA. Fannie and Freddie impose rigorous income and credit standards, so that in general, borrowers who obtain government-backed loans are in a stronger financial position than those who get mortgages from private lenders.

What the government’s programs don’t do is provide assistance for the generally more stressed families either living in dwellings with home loans provided by private lenders, or to folks renting those homes. Those Americans not only far outnumber households that benefit from federally supported financing, they’re also the restaurant employees, construction workers, farmhands and hospital orderlies whose jobs and incomes suffered most from the crisis. The hardest-hit families are blue-collar tenants that in the best of times pay a huge portion of their slender incomes on rent.

“The housing policies arising from COVID-19 have created a gap between government- and nongovernment-supported households that does not address financial needs,” says Sandeep Bordia, director of research at Amherst Holdings, a real estate investment and financing firm. “It isn’t driven toward helping families that make, say, $40,000 a year and lost their incomes. Instead, those programs typically help higher-income people who happen to have government-backed mortgages.” Those middle-class borrowers and renters, he adds, are also far more likely to have kept their jobs.

Amherst warns that the U.S. could undergo as many foreclosures over the next couple of years as the 7.8 million the nation endured during the Great Recession. That’s a worst-case scenario, he adds, assuming that Washington provides no targeted support to the most at-risk owners and renters, and that the recovery is a slow one. If that happens, around one in 15 of all the dwellings in America could be repossessed by lenders and resold, possibly at distressed prices. Fortune also estimates that evictions would spike by around one-quarter, to over 1 million a year—levels witnessed in 2008 and 2009.

Federal housing agencies are providing robust relief

Amherst recently issued a study examining how the gulf between the generous assistance in the government-backed sector will cushion family finances, while the lack of aid for privately financed homeowners and renters spells big trouble. The topic is central to Amherst’s business: Its Main Street Renewal arm manages 20,000 single-family houses––and owns most of them––leased to mainly blue-collar tenants, ranking in the top five among the single-family rental companies, a group that includes Invitation Homes, American Homes 4 Rent, and Progress Residential.

In the report COVID-19 Relief Helps Some, Leaves Over Half the Households Vulnerable, Amherst points out that 48.1 million, or 39%, of America’s 124.1 million households, defined as dwellings occupied by a single or family, is either owned by a federal agency such as HUD, or supported by U.S.-guaranteed home loans backed chiefly by Fannie Mae, Freddie Mac, Ginnie Mae (for FHA mortgages), or the Veterans Administration––of course, the households benefiting from federal loan guarantees make up the vast bulk of the total.

These government-sponsored enterprises purchase and guarantee mortgages originated by banks and other financial institutions. Under the CARES Act, borrowers can qualify for 180 days of forbearance and thereafter, request an additional 180 days. Hence, households that lost income because of the pandemic can skip payments for a total of 12 months. At the end of the grace period, the owners will still owe the full amount, including past-due interest and principal. But the FHA has stated that its borrowers won’t be forced to get current by paying the big lump sums, and other guarantors are likely to follow the FHA’s lead. That means borrowers will get still more breathing room as overdue payments are spread well into the future.

How about tenants in houses and apartments owned by landlords that hold government-guaranteed mortgages? Federal regulators stipulate that starting March 27, tenants can miss paying rent for 120 days without being evicted; when the moratorium ends, the landlords must provide 30 days notice before forcing the tenant to leave. But because the stressed landlords will reduce their cash burden by forgoing mortgage payments for up to a year, it’s likely that they will extend forbearance to their tenants well beyond the four months required by regulators.

The mortgage have-nots

By contrast, the remaining 77 million households, 61% of the total, own or rent homes that don’t have government-backed mortgages. But those are Americans with both the lowest incomes, and the folks enduring the most devastating job losses. Of that group, around 33 million own their homes free and clear, or hold properties that don’t generate rent, often because they’re offered free to family members. That leaves 44 million who live in houses or apartments financed by private lenders. Meet the Americans most battered by the pandemic.

It’s remarkable that the proportion of tenant versus owners skews much higher in this nongovernment-backed sector. In part, that’s because the ranks of renters has swelled dramatically since the Great Recession. “After the financial crisis, it became much harder for people to qualify either for a private or a federally guaranteed mortgage,” says Bordia. “It was the shortage of credit that drove the rental wave.” Since 2007, the number of rental households has jumped by 4 million. That’s an outsize share of all the families and singles that moved into a new dwelling over the past 13 years. In the last couple of years, a buoyant economy has lifted home ownership and curbed rentals. Nevertheless, all told, over the past 13 years, rental households have ballooned from 32.5% to 36% of all U.S. households, constituting the biggest single trend in U.S. housing

Of the 48 million households covered by agency mortgages, only 12.3 million, or 20%, are renting. But in the much larger, privately financed category, more than twice as many, 28 million properties, are occupied by tenants. Of those, almost two-thirds live not in high-rises or garden apartments, but single-family homes, or buildings with four or fewer units. And all but a sliver of the market managed by big investors such as Amherst and Invitation are owned by the likes of local lawyers, dentists, or restaurateurs and other stalwarts of suburbia.

Low-income renters are hardest hit

Here’s the mismatch: The Americans living in privately financed homes are mainly renters who aren’t getting housing aid, and those occupying dwellings with agency mortgages are mostly owners benefiting from holidays on mortgage and rent payments. Yet the renters need the relief a lot more, for a fundamental reason: Their incomes are a lot skimpier than paychecks for homeowners.

Bordia cites data from the American Community Survey spotlighting that wide disparity. The median income for America’s tenant households was $40,000, less than half the figure for homeowners holding mortgages–-once again, the leading profile for the households targeted for housing assistance. On average, renters spend one-third of their income on housing versus one-quarter for owners. One tenant in four channels over 50% of their pay on rent, versus one in nine for homeowners with a mortgage.

The lockdown has hit low-wage earners far harder than the middle class and above. By Amherst’s estimates, one-quarter of workers making $30,000 or less lost their jobs since early March. The rate was still extremely high at one in five for folks earning from $30,000 to $70,000, but from $70,000 and up, only one in nine joined the parade of the unemployed. It’s clear that America’s most vulnerable are renters living paycheck to paycheck. That’s precisely the group that desperately needs aid earmarked at helping them remain in their homes and apartments, and isn’t getting it.

Where the big gap in housing policy could lead

The raft of relief programs designed to help Americans weather the shutdown includes a number of provisions that do help that big, super-fragile army of low-income renters. The stimulus measures include the $1,200 one-time payments per adult, and the $600-a-week federal boost to the unemployment benefits provided by the worker’s state of residence. The U.S. also mandated that the regular jobless benefits be extended from 26 to 39 weeks.

But that extra income isn’t nearly enough to ensure that the Americans most at risk for eviction and foreclosure can keep paying their rent, or their mortgages plus property taxes and insurance. Many states do not provide unemployment payments unless the worker’s income is lowered by at least 20%, and many workers get no help even though their incomes fell just short of that threshold. The $600 federal payments run out on July 31, and the cash payments for the jobless average $378 a week, or less than $15,000 over that extended, 39-week period.

The private lenders are also helping out. JPMorgan Chase and Wells Fargo are allowing borrowers to postpone payments for 90 days. But the scope of big lenders’ forbearance is limited by the need to protect their scarce capital against the threat of big looming credit losses. Both low-income owners with private home loans, and the millions of landlords that own and rent one or a couple of houses, are especially exposed to foreclosures.

As tenants stop paying, the mom-and-pop brigade will increasingly struggle to cover mortgage, taxes, and insurances on their rental homes. “Tenants may not pay rent, meaning that many families who may be dependent on incoming rental payments will be without a source of income until renters begin repayment,” cautions Bordia. The owners themselves may have lost jobs or part of their income as well. The trickle down from enhanced unemployment benefits won’t do much to offset the deficit when newly jobless tenants in two out of the owner’s three houses cease paying rent.

Bordia warns public policy is missing just the group it should be targeting. If the U.S. marshals relief specially crafted for these ultra-endangered renters and landlords, he says, a foreclosure and eviction flood can be averted. For families under financial stress not experienced since the Great Recession, nothing is so important as the protection of a safe place to live—and the government’s multitrillion-dollar response fails to address the needs of America’s most vulnerable.

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