The federal government has engaged in a policy designed to keep homeowners in their homes during the Covid-19 economic crisis. The intent is a noble one. Without such a policy there is no guarantee that foreclosures would not have spiked instead of lenders being forced to renegotiate loan terms. However, as the policy nears its second year, and the CFPB begins to lobby for a one year extension to 2022, its important that we look at the unintended consequences of this policy.
A thought experiment: You purchased your home in 2019, based on sound economic decisions. The home was well priced, the loan had good terms, and your family made enough to cover the mortgage. Obviously, no one saw 2020 coming. Now, you find yourself in a service job that has been decimated for an entire year. In a normal economy, market factors would have forced you to sell the home you could no longer afford, but its 2020, and the federal government has forbid the bank to foreclose, so you wait, and wait, and wait. At the same time, your home explodes in value.
Why would any rational person sell their home under this scenario?
There is a sector of the economy that is holding homes currently that would have been on market. There is a “wave” of foreclosures waiting to hit the market often reported. There is a growing confidence that the economy is mending, and willingness to change from the job they‘ve been stuck in during Covid to greener pastures.
If the CFPB is successful in their strategy, the first group will have another year to hold their properties. The second group will continue to grow. The third will likely inject some inventory to the market. If not, the lending sector will have to be very cautious and measured to make the “wave” as low as possible. To borrow Covid language, we need to flatten the curve. If a sudden spike of inventory hits the market, this will send prices sharply lower. Whenever these policies are retired, lenders must release this inventory slowly, or risk seeing a housing recession.