THERE IS no point in denying reality, which has become clear with frightening speed: The U.S. and global economies have gone from fairly robust stability to free fall. There is hope that public health measures may succeed in halting the virus, the downward slide may be arrested — and normal activity may be restored — within a relatively short period. Meanwhile, however, the watchword of public and private institutions in financial matters must be forbearance.
To the extent possible, households and businesses, especially the poorest of the former and the smallest of the latter, should be allowed to postpone payments that would otherwise be due. As financial expert Mohamed A. El-Erian puts it in a sobering new Foreign Affairs article, generous forbearance can help “prevent liquidity problems from becoming solvency ones.”
The Trump administration has already announced a 90-day interest- and penalty-free delay in federal income tax payments, along with suspension of student loan interest payments. The Federal Housing Finance Agency (FHFA) contributed Wednesday by instructing the two mortgage-finance agencies it regulates, Fannie Mae and Freddie Mac, to suspend foreclosures and evictions for at least 60 days on the $5.5 trillion worth of mortgages they back, equal to nearly half the market. Importantly, this could benefit both homeowners and rental tenants in multifamily buildings backed by Fannie and Freddie.
The FHFA previously instructed Fannie and Freddie to extend up to 12 months’ worth of mortgage postponement to borrowers suffering hardship related to the coronavirus. That is not everyone: Borrowers who retain the wherewithal to meet their obligations can and should be encouraged and incentivized to do so, in order to husband public resources for the benefit of those who need them most. And many details of the FHFA’s directives remain to be worked out.
The general idea, however, is sound: By stabilizing family finances at their essential points of vulnerability — monthly mortgage and rent payments — forbearance will free up families’ cash for other needs, such as utilities and food. Obviously, this is not a total solution for those living paycheck to paycheck, much less those living in poverty. Still, it is worth noting that the bulk of American households are in far better financial shape at the outset of this crisis than they were just prior to the Great Recession. Overall, American households have positive net worth. Household debt service as a percent of disposable income stood at 9.7 percent as of October 2019, compared with 13.2 percent in January 2008. This year began with only 3.5 percent of all mortgaged properties worth less than their outstanding loan balances, according to CoreLogic; at the height of the Great Recession in late 2009, some 26 percent were underwater.
Ordinary people and small businesses will need to stretch whatever modest equity and reserves they may have accumulated to get through this crisis. It is in everyone’s interest — including their own — for government and creditors to help them do it.