By David Pendered
Gambling in the stock market and paying off higher-interest loans is the way some homeowners may be using the mortgage payments they’ve not had to pay during the pandemic, according to a report released Thursday by the Atlanta Fed.
These borrowers are: “essentially using the CARES Act forbearances as a government sponsored debt consolidation program [and] advantaging credit card, auto loan, student loan, and other consumer credit issuers at the expense of mortgage lenders,” according to a footnote in a report issued Thursday: An Update on Forbearance Trends.
The number or forbearances has increased steadily since April 1 in terms of the number of borrowers who have taken forbearance, according to the report. The take-up rate of just above 2 percent has risen to as high as 12 percent.
Experimental evidence shows the following use of money that’s not being paid to mortgage lenders, according to the footnoted report. The use of funds is followed by the proportion of borrowers who may be using it for an alternative purpose:
- Stock market investments – 7.91 percent;
- Treasury Inflation-Protected Security/CD – 6.12 percent;
- Student loans – 4.29 percent;
- Auto loans – 4.98 percent;
- Credit cards – 11.61 percent;
- Food and clothing – 25.83 percent;
- Stockpiled in cash – 22.26 percent.
The result is the diversion of, potentially, more than $10 billion a month from mortgage lenders. This represents 26.21 percent of the forbearance proceeds that homeowners are reallocating from their mortgage to an investment or other debt.
This is an unintended consequence of the honor system provided in the CARES Act. One solution, which could save taxpayers billions of dollars a month, is to require borrowers to sign a document stating they are experiencing a COVID-19 related decline in income, the report states.
This requirement would cause some borrowers not to seek forbearance: They would not seek forbearance because they know that the post-mortem review of their case would show they did not need financial help, thus triggering stiff penalties.
This outcome isn’t what Congress intended when the CARES Act instructed federal lending agencies to allow mortgages to go into forbearance with reduced – or totally eliminated – negative outcomes for borrowers and lenders. A number of private lenders adopted similar provisions.
The CARES-backed program is based on an honor system. The borrower must notify the borrower of a financial distress, and the lender is required to: “1) apply no penalties, late fees, or interest, (2) halt all evictions and foreclosure sales of borrowers, and (3) suspend reporting to credit bureaus of delinquency related to forbearance.”
Consequently: “there is virtually no direct cost to the borrower to engage in CARES Act qualified forbearance.”
In all, CARES Act protects an estimated $6.8 trillion of the nation’s outstanding mortage balance of $11 trillion, spread over about 50 million loans. The average monthly mortgage payment was about $1,250 a month, to include principal, interest, taxes and insurance.
The latest survey, cited in the Update on Forbearance Trends, covers more than 75 percent of first-lien mortgages and the Atlanta Fed views it as representative of the market. The survey was conducted by the Mortgage Bankers Association, which has started a weekly Forbearance and Call Volume survey of its members.