Jim Millstein, the co-chairman of Guggenheim Securities, said financial markets are headed into a period of “significant volatility” with default rates expected to spike as we move closer to the end of the year.
“Fasten your seatbelts, it’s going to be a bumpy ride,” Millstein said Tuesday in a Bloomberg Television interview. Defaults will pick up as tumult in the financial markets persists, he said. “The continuing inability to get the pandemic under control in the United States,” the upcoming election and “a change in macroeconomic policy at the Fed” all contribute to the ongoing volatility. Ratings companies are also forecasting more defaults. The rate fell in August, as expected, since the last month of the summer is typically slower for nonpayments. But S&P Global Ratings expects the the pace of defaults to increase “amid the continued impact of Covid-19 on economic and credit conditions,” Sudeep Kesh, head of S&P global credit markets research, wrote in a report last week. Polarized politics Millstein, who was the restructuring chief at the Treasury Department in the wake of the financial crisis, cited polarized politics as a reason for uncertainty in the equity and credit markets. “The election itself will serve as a significant source of volatility” as November approaches, he said. The first stimulus bill from the government “put a floor under the economy and credit markets,” Millstein said. Heading into the election, “it isn’t surprising Washington” hasn’t been able to close in on the next steps to support jobs and growth. Pressure is also mounting at the corporate level for landlords who rely on businesses to make a profit and pay their rent, according to Millstein. “Some businesses that are barely hanging on are not paying,” and landlords will have a “hard time” as a result. Hardships will pile on, Millstein says, pointing to weakness across many sectors of the economy. The default rate on commercial mortgage-backed securities will approach high single digits by year-end, Fitch Ratings predicts. Continuing high unemployment rates and virus-related shutdowns will lead to a “froth around commercial real estate markets,” Millstein said. Skipped payments will create a ripple effect across the sector, creating “a significant hit” on the economy.
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The rate of serious mortgage delinquencies spiked in June to its highest level in more than five years, according to a new report by CoreLogic.
On a national level, 7.1% of mortgages were in some stage of delinquency in June, according to CoreLogic’s latest Loan Performance Insights report. That’s a 3.1-percentage-point increase over the delinquency rate of 4% in June 2019. While early-stage delinquencies (30 to 59 days past due were at 1.8%, down from 2.1% in June 2019, adverse delinquencies (60 to 89 days past due) and serious delinquencies (90 or more days past due, including loans in foreclosure) were both up year over year. Adverse delinquencies represented 1.8% of all mortgages, up from 0.6% in June of last year. Serious delinquencies accounted for 3.4% of all mortgages, up from 1.3% in June 2019. This is the highest serious delinquency rate since February of 2015, according to CoreLogic. “The housing market is facing a paradox,” CoreLogic said. “The CoreLogic Home Price Index shows home-purchase demand has continued to accelerate this summer as prospective buyers take advantage of record-low mortgage rates. However, mortgage loan performance has progressively weakened since the start of the pandemic.” Sustained unemployment due to the economic impact of the pandemic has pushed many homeowners further into delinquency. With unemployment projected to remain high through the end of the year, there may be further impacts on delinquency and foreclosure, CoreLogic said. The analytics firm predicted that unless additional government support programs are enacted, serious delinquency rates could nearly double by early 2022. Not only could millions of families lose their homes, but this could also create downward pressure on home prices as distressed sales are pushed back into the market, the analytics firm said. “Three months into the pandemic-induced recession, the 90-day delinquency rate has spiked to the highest rate in more than 21 years,” said Dr. Frank Nothaft, chief economist at CoreLogic. “Between May and June, the 90-day delinquency rate quadrupled, jumping from 0.5% to 2.3%, following a similar leap in the 60-day rate between April and May.” “Forbearance has been an important tool to help many homeowners through financial stress due to the pandemic,” said CoreLogic President and CEO Frank Martell. “While federal and state governments work toward additional economic support, we expect serious delinquencies will continue to rise – particularly among lower-income households, small business owners and employees within sectors like tourism that have been hit hard by the pandemic.” Shortly after revealing its plans for a new nation-wide moratorium on evictions Tuesday, the Centres for Disease Control and Prevention found itself in the crosshairs of the country’s housing industry, tenants’ rights advocates, landlords, and even legal scholars.
The CDC order bans landlords from removing from their properties tenants who are unable to pay their rent because of COVID-19-related financial hardships until December 31, 2020. The CDC’s ban follows the Federal Housing Finance Agency’s own extended moratorium on evictions and is intended to help keep an estimated 40 million rental households in place at a time when the country’s economic future and ability to restrain the coronavirus pandemic are both in serious question. The CDC order isn’t exactly comprehensive. It applies only to renters making $99,000 or less, and anyone seeking eviction relief is required to both pay as much rent as they can afford and provide a written declaration agreeing to the CDC’s terms. (In case the poor had forgotten about the Trump administration’s opinion of them, the declaration reminds renters that if they “lie, mislead, or omit important information” they can be fined up to $250,000 and sentenced to a year in jail, an ironic punishment considering the rate of COVID-19 infection taking place in America’s prisons.) Additionally, individuals can still be evicted for reasons other than not paying rent or making housing payments, and nothing in the order prevents “the charging or collecting of fees, penalties, or interest as a result of the failure to pay rent or other housing payment on a timely basis, under the terms of any applicable contract,” according to the CDC, creating a scenario where millions of renters will be buried under mountains of debt. There is also no language in the order that requires landlords to apprise their tenants of the new moratorium. “This is a band aid, not a solution,” wrote The Center of Budget and Policy Priorities’ Peggy Bailey in a September 1 tweet. “While the moratorium extension is a step in the right direction, it does little to adequately meet the needs of millions of families who are behind on their rent.” In a tweet of her own, Diane Yentel, president and CEO of the National Low Income Housing Coalition, called the moratorium “a half-measure that extends a financial cliff for renters to fall off when the moratorium expires and back rent is owed.” Dominoes falling The potential loss of millions of rents until January 1 has America’s housing industry and landlords on edge as well. In comments to NPR on Wednesday, Rich McGimsey, the owner of 315 apartments in Virginia, described the CDC order, and the pressure it puts on landlords, as a “burden”. “What are we going to do? If nobody pays the rent, how are we going to pay our banks? How am I going to pay my employees?” McGimsey said before telling host Mary Louise Kelly that he has yet to miss any of his own payments or had to carry out an eviction during the pandemic. McGimsey predicted that the CDC moratorium will have “all kinds” of unintended consequences. “If apartment providers are going to look at a resident coming in and think, well, they may not pay, and if they don't, they're going to stay here till April 2021 [McGimsey made repeated mention of the possibility of eviction moratoriums lasting until then], then you're going to raise your criteria. It's going to be so much harder for people with blemished credit to go ahead and get an apartment,” he said. In a statement, Mortgage Bankers Association CEO Bob Broeksmit described the destabilizing cascade effect a lack of rent payments could have on the country’s housing providers, “millions” of whom, he said, “will be unable to meet their mortgage obligations, make payroll to their own employees, maintain a safe and healthy living environment for their tenants, and pay their state and local government property taxes.” NerdWallet’s Holden Lewis had a different take on the ban. “It's a shrewd move,” he told Mortgage Professional America by email, “because the eviction moratorium will cause a crisis for landlords, and the crisis might motivate Congress to do something. Landlords now have ample reason to pressure Congress into providing financial relief.” Questions over legality The CDC ban is also being questioned by law experts, who feel it may be on the receiving end of legal challenges. The 1944 Public Health Service Act granted the CDC the power to take actions it feels are necessary to stop the spread of infectious diseases across state lines, but there is no mention of the CDC having authority over housing policy. According to law professor and director of American University’s health law and policy program Lindsay Wiley, the Act focused on more general practices, such as sanitation and fumigation. “I absolutely do expect to see legal challenges,” Wiley told The Hill. “The CDC has really broad authority on its face, but it's never pushed the boundaries of that authority.” |
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