MReport August 2020

TheMReport — News and strategies for the evolving mortgage marketplace.

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16 | M R EP O RT COVER STORY "Mortgage investors are likely to raise their risk premiums and significantly shrink their credit ap- petites to all but the most pristine credit if they are forced to absorb losses from mortgage forgiveness policies. Similarly, rent forgiveness policies that are financed by land- lords are likely to result in the re- duced stock of rental housing and reduced investments in upkeep and maintenance of existing rental properties," Rood said. Rood added, "The domino ef- fects are already being felt as some are pushing for payment holidays for the owners of rental properties and other commercial real estate dwellings across the board. Most notably, Oregon recently passed House Bill 4204, which effectively creates a stand-still agreement for any borrower that had a previously performing property pre–COVID-19. These forbear- ances and moratoriums are just pushing the financial risk through the system from homeowners and renters to property owners and lenders." Rood added that there are other potential solutions out there, such as expanding the Section 8 housing voucher program to include all that qualify, versus the current lottery system. "Such a change would go a long way to helping most vulner- able to economic shocks," he said. Pinto said forgiving mortgages and rents during this pandemic would be a "huge hit" to the GSEs, the VA, and private lend- ers and banks. He noted there is roughly $10 trillion in outstand- ing mortgages, and assuming you forgive 8% of loans, that could translate into a loss of $100 billion. "I know Washington throws money like $100 billion around like water, but $100 billion is a lot of money," Pinto said. Rood said he is becoming increasingly concerned about the lawmakers' embrace of the Modern Monetary Theory (MMT). In the past, debt bubbles were managed using one of three meth- ods—grow your way out, default your way out, or inflate your way out of the bubble. "Deficit spending for things other than for fiscal stimulus or infrastructure investment is a relatively new phenomenon, but we have taken to it like a duck to water," Rood said. "We certainly cannot be uncharitable during these unprecedented times, but we also have to look critically at the long-term impact of extended (beyond the CARES Act dura- tion) foreclosure and eviction moratoriums, extended forbear- ances, distorted credit reporting, and the potential risk of a 'zombie housing market' that no longer supports fundamental laws of supply and demand." Rood encourages policymak- ers to start a dialogue with real estate investors and explore where they could be leveraged to partner with struggling homeowners to keep them in their homes. "Real estate investors could buy distressed homes and rent them back to struggling house- holds, or investors could enter into equity-sharing contracts with homeowners to cash out some of their equity while preserving the opportunity to buy it back in the future," he said. "The govern- ment can assist with vouchers or emergency aid to struggling households to assist with their debt service and improve the risk calculus from prospective sources of private capital." Regarding the Trump ad- ministration's work in housing, Rood said the FHA had a lot of work to do to repair its relation- ship with the mortgage industry following the 2016 Presidential Election. "Few would argue that the FHA was in dire need of struc- tural reform in 2016," Rood said. "The FHA was struggling under outdated technology, underdevel- oped risk-management functions, a backlog of interpretive guidance to be published, and a workforce that was at or near retirement age (24% at retirement age in 2018 and forecasted to go to 45% by 2023)." Rood added that one of the primary restraints to the FHA's progress was that it was op- erating without a confirmed Commissioner for almost four years until Brian D. Montgomery was finally confirmed and ap- proved. "Over the last two years, FHA has put together a world- class leadership team, de-risked the program by modifying the annual certifications made by lenders, entered into a Memo of Understanding with the Department of Justice to de- weaponize the False Claims Act, secured $80 million of funding to invest in IT modernization, and has published as many Mortgagee Letters in the last two years as it did in the combined four years that preceded them," Rood said. The FHA's leadership, accord- ing to Rood, has demonstrated an "intense commitment" to being better business partners to its lender partners. He added: "Those accomplishments have also been augmented with a doubling of cash reserves which will further insulate taxpayers from credit losses." Golding, however, said issues with the FHA and HUD go back decades—not just four years. He added that the departments need to fund housing vouchers at levels that meet market needs, as just one in five families who would qualify for vouchers are able to get them. Golding added that the Fair Housing Act of 1968 needs to be "vigorously enforced to eliminate segregation." "A complete, across-the- board mortgage and rent forgiveness plan seems to be a blunt approach that would have much larger costs than a more targeted assistance program." —Danielle Hale, Chief Economist,

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