During the COVID-19 pandemic, household and mortgage debt, which was already high, has climbed by over $1 trillion. Mortgage payments that households were allowed to miss due to pandemic emergency policies are now back on the table, causing a looming challenge for many households.
If we want to use the pandemic crisis to think more creatively about debt relief and housing, we might take a look backward to the Great Recession of 2008. In that crisis, the house of cards created by a vast oversupply of homes and unpayable loans came crashing down. Six million people lost their homes, and more than 10 million of the nation’s 52 million mortgages ended up underwater.
A number of commentators, including Trump’s political advisor Steve Bannon, attributed much of Trump’s success in the 2016 election to this economic wreckage. Banks were bailed out, but households weren’t.
I’ve spent much of my career in banking, and if I could have a banker’s do-over on the 2008 financial crisis I’d have proposed a mortgage debt relief program that would have allowed many to remain in their homes. It would have also addressed critical fairness issues that so often derail debt relief proposals in Washington. This very same kind of program could be used today to address looming mortgage payment problems related to the pandemic.
To understand my proposal, we need to know something about how lending works and the banker’s insider view of mortgages. Take home with a $300,000 mortgage but with a market value of $240,000 because of the 2008 crash. That home is $60,000 “underwater.” If a lender were to have written down the amount of that mortgage at the current market value of the home, they would have had to take the entire $60,000 write-down as a loss at that moment. But so many homes were underwater that lenders were loath to write down those mortgages because the lenders would have gone bankrupt.
In 2008, a program — voluntary for the borrower — might have been enacted that would have allowed a lender to write down the underwater portion of the mortgage over 30 years, instead of all at once if that lender in turn immediately reduced the principal on the borrower’s mortgage by that same amount and also proportionally reduced the monthly payment.
There is regulatory precedent for such deferrals, and it would have appealed to lenders because they’d have still been able to take the tax benefit of the loss, and the deferred amount wouldn’t be counted against capital or reserves.
In exchange for this benefit — the element that creatively balances debt relief with fairness — the borrower would have been required to give the lender some portion of the gain on the subsequent sale of the home, based on the amount forgiven. Let’s say that the gain portion was 30 percent. When the home was sold, the lender would get 30 percent of the gain. This feature would address the fairness issue: anyone willing to cede a portion of the gain on the sale to the lender would qualify to participate.
The mortgage problem caused by the pandemic isn’t so much about plummeting house values as deferred mortgage payments that are going to have to be paid or otherwise dealt with someday after relief programs end. And when that “someday” arrives, many borrowers who can’t even make current mortgage payments will have little realistic chance of making those missed payments.
A program could be offered through the end of 2023 that would allow the missed payments and interest, plus up to an additional 20 percent of the principal balance, to be written down — all at the borrower’s discretion.
My proposed COVID-19 Mortgage Relief Act would provide significantly lower monthly payments and thus substantial relief to borrowers who take advantage of the program. At the same time, the lender could amortize the write-down over 30 years, get a current tax benefit, and have a negotiated equity upside upon sale.
In fact, some lenders today are already giving borrowers the option of putting missed payments into a subordinate lien, repayable only when they refinance, sell, or terminate their mortgage.
This approach would critically reconcile substantial mortgage debt relief with fairness and feasibility.
The views expressed in this book are those of the author and do not reflect the official policy or position of the Commonwealth of Pennsylvania.
Richard Vague is Secretary of Banking and Securities for the Commonwealth of Pennsylvania. Prior to his 2020 appointment, he was managing partner of Gabriel Investments. Previously, he was co-founder, chairman, and CEO of Energy Plus, an electricity, and natural gas company. Vague was also co-founder and CEO of two banks and founder of the economic data service Tychos. He currently chairs The Governor’s Woods Foundation, a nonprofit philanthropic organization. His new book is The Case for a Debt Jubilee (Polity Press, Nov. 22, 2021). Learn more at richardvague.com.