Payback Time: Why COVID-19 Forces the Federal Government to Pay Its Debt to Housing
by Anne Segrest McCulloch, Social Impact CEO
As a nation, we face a moral imperative: shelter-in-place orders today should not have the effect of soon denying shelter to Americans.
For the past 10 years, Washington has imposed a hidden tax on homeowners and renters so that it could keep the federal budget afloat. Every month, Americans paid their mortgages or covered their landlord’s mortgages by paying rent. That money flowed to and through two, giant, government-controlled utilities — Fannie Mae and Freddie Mac — and directly into the U.S. Treasury.
It was an unfair transfer of wealth. And it’s time to pay it back. Why? Because the COVID-19 crisis is about to spawn a housing crisis that, as things are currently structured, we simply cannot manage without those funds.
Let’s face it, it was a great deal for those charged with trying to balance the budget. The revenue grab was made possible politically by the lingering resentment of Fannie and Freddie’s past, perceived sins.
It almost felt like free money. But it wasn’t. And most Americans, going about dutifully paying their mortgage or rent, had no idea their money — which could have been used to keep a housing finance system healthy for all — was being funneled into the U.S. Treasury.
What is this thing we call the housing finance system? Put it this way: If you’re paying for a roof over your head, there’s a complex web of pipes and levers uniquely constructed to get money flowing to you, in the form of funds for buying, selling or investing in that roof, and millions more like it. That same plumbing also flows in reverse, taking those billions in monthly payments back upstream to replenish the supply for others.
When the federal government nationalized Fannie and Freddie in 2008, that pipeline was redirected to feed the federal budget — the whole budget, not just federal housing programs.
It would have been better if they had allowed that money to continue circulating within a system that is specifically designed to assure, for all Americans, accessibility and affordability in housing. But they didn’t. And now, as jobs disappear and wages disintegrate, many thousands of Americans face foreclosure or eviction, with only the thread-bare facsimile of a safety net.
Federal officials, of both parties, could have reserved that capital for this rainiest of days. That would have strengthened Fannie and Freddie, so that they would be ready to do what they always were intended for: to provide strength and stability in the housing of Americans, especially in the worst of times.
Now Fannie’s and Freddie’s federal conservator has warned, in an interview with the Financial Times, that the two firms could run out of money in just three months and would then require yet another federal bailout.
So, what does that mean for the well-being of our fellow citizens? In a phrase, housing insecurity. In times of hardship, nothing is more important than a secure place to live.
Today, Americans are hurting. Public relief is not yet flowing fast enough to mitigate the pain that is rapidly flowing toward homeowners and renters, as well as landlords, financial institutions, and, ultimately, bondholders.
Renters often have relatively few funds in reserve, so they and the owners of their rental properties need emergency support right now. Too many renters simply will not have the ability to make up missed rent payments.
In ordinary times, it might take two to three weeks after a worker filed for unemployment insurance to get a payment. With record-high first-time jobless claims, that time can be expected to stretch out considerably. Meanwhile, a 2018 Federal Reserve study found that almost 40 percent of American adults wouldn’t be able to cover a $400 emergency with cash, savings or a credit card charge that they could quickly pay off. As a result, families are tapping their limited resources to pay for food and medicine and may have little to nothing to apply to rent.
The current proposals for mortgage forbearance for apartment owners provide for up to three months of mortgage forbearance in exchange for a moratorium on evictions and waiver of penalty fees. That’s a good start. But the current guidance also would require repayment of the deferred mortgage payments over the following 12 months. Unless renters can make up their lost payments, after the moratorium is lifted, apartment owners who don’t have deep, deep reserves will have only two choices to make up the gap left by renters who don’t make up their delayed payments: 1) charge higher rents or b) evict renters and start collections actions. Either will hurt the millions of working families who, even before today’s crisis, found it nearly impossible to find safe, decent or affordable housing.
Homeowners can also apply for hardship forbearance on their mortgages. If Fannie and Freddie, and the Federal Housing Administration (FHA), apply the lessons learned during the 2008 financial crisis, homeowners will ultimately be able to get a loan modification (and maybe even loan forgiveness), when we begin to emerge from the COVID-19 crisis. But that is going to require a well-functioning system which includes: a) mortgage servicers having the capacity to engage consumers immediately; and b) capital on hand, at Fannie and Freddie, to make up for shortfalls in collections, so they can make good on commitments to bondholders to make timely payment of principal and interest.
As a nation, we face a moral imperative: shelter-in-place orders today should not have the effect of soon denying shelter to Americans. The federal government should immediately return to housing a significant portion of the funds it has drained from the housing finance system. Yes, it’s a radical departure from the direction we all thought we were headed with Fannie and Freddie only a few weeks ago. The generally accepted plan was to free them from government ownership. But this would be an absurd time for the government to conduct an IPO, which the releasing of the two firms would essentially be.
COVID-19 has changed the paradigm for many things. Fannie and Freddie are no different. The good news is that they are extremely well-equipped to execute this payback to housing from the federal government. It would require no reengineering of the way they operate because they already are embedded in the nation’s mechanisms for delivering liquidity for housing. It’s what they do.
Paying back its debt to housing is the right thing for the federal government to do. It is the only thing that will bring real stability to housing. In this unprecedented time, it’s the best way to support homeowners and renters, as well as the infrastructure of property owners, lenders and mortgage servicers who keep the nation’s housing system intact.
Anne Segrest McColloch is President and CEO of the Housing Partnership Equity Trust (HPET) and a former Fannie Mae executive. HPET is a Washington, DC-based social-purpose real estate investment trust (REIT) that acquires and preserves affordable housing in partnership with leading nonprofit apartment owners.