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The looming economic crisis as a result of coronavirus is arguably just as alarming as the effects of the physiological virus itself. In an effort to combat the risk of recession or worse, Italy has elected to suspend mortgage payments for those who own their homes in addition to several other emergency measures. But while this may be a viable path forward for Italy, the same solution isn’t likely to work in the United States for several reasons.
At the time of this writing, Italy has 35,000 active cases of coronavirus. Prior to reaching this number, Italy’s government suspended mortgage payments on March 10 as an emergency measure while the rest of the country was systematically locked down. The lockdown was initiated on Tuesday morning and included the cancellation of public gatherings as well as the closing of universities and schools until April — at the earliest.
The logic behind this financial move is relatively simple: if people can’t come to work, then they can’t get paid and make their mortgage payments. By suspending mortgage payments for the time being, it allows people to not only use whatever money they’ve saved so far for essentials but also prevents them from being evicted when they have no chance of earning their mortgage payment as of now.
This is particularly effective for Italy, as more people own their homes in the country as opposed to places like the UK or the US. Only about 15% of Italy’s population makes a mortgage payment. Notably, this economic measure does not currently include those who pay rent, leaving a plurality of Italy’s population still in a stiff financial bind.
Many in the US have wondered whether the so-called “mortgage holiday” would also be coming to their shores. However, this is unlikely for several reasons.
For starters, the majority of American mortgages are currently drafted with certain legal terms that determine what lenders can or can’t do. This necessarily limits the ways in which lenders can suspend payments or agree to allow owners to pay a lower amount for a certain period of time. Even if a home lender or bank wanted to lower mortgage payments, they may not be able to without going through certain legal processes. In any event, there’s no current legal way for a universal mortgage halt across the country, as this decision is out of federal hands.
Additionally, mortgage payments that are halted rather than erased will also accrue interest which must eventually be repaid. This could theoretically lead homeowners or rental tenants with higher than average payments once the holiday period is over.
Even worse, America has a much larger mortgage market than Italy’s, totaling about $11 trillion in home loan debt. This means that halting mortgage payments on this scale would have much wider economic repercussions compared to Italy’s home mortgage market at about $423 billion.
Although the canceling of mortgage payments may not be a viable alternative for American homeowners, there may be a different form of relief on the horizon.
Federal Housing Finance Agency Mark Calabria has advised various mortgage services like Fannie Mae and Freddie Mac to provide forbearance options to their homeowners. A forbearance option involves the lender temporarily lowering or halting mortgage payments for periods ranging from several months to six months.
This is not the same thing as canceling mortgage payments, as interest still occurs over time and will eventually be added to the overall loan total. However, the forbearance option can be agreed upon with a repayment plan that could allow the homeowner to pay off the missed mortgage payments once finances are in order.
Ultimately, the difference between these two measures is that Italy’s solution affects a much lower percentage of the population and doesn’t necessarily involve interest payments depending on how the situation develops. The US solution relies on an option already agreed upon in most mortgage legal documents and follows guidelines that were in place before the development of the coronavirus and the economic crisis currently growing.
As the economy continues to fall, support for more drastic measures may increase, particularly as many Americans pay rent, just like in Italy.
Time will tell whether the hardship forbearance options offered by many lending organizations will be enough to offset the economic difficulties many Americans will likely face in the coming months. They will need to eventually pay back the mortgage payments they miss, which doesn’t really eliminate the economic strain of high mortgage payments. It merely kicks them down the road.
Ultimately, more drastic measures may need to be taken if the virus’s spread continues and people are unable to work for more than a few months.
What do you think about the financial impact the coronavirus is having on the US economy? Is hardship forbearance enough to save American homeowners? Let us know what you think in the comments section below.
Image courtesy of Focus Mortgage Solutions.