An Insider’s Perspective on the Covid-19’s Financial Impact
Contact: Troy Doucet, Doucet Gerling Co LPA, (614) 221-9800, www.loanlawyer.law
August 25, 2020
Our law firm helps people facing foreclosure. We also help businesses facing issues with debt. We are on the front lines of discussions with people facing the financial impact of Covid-19. Because we fight cases against banks without bankruptcy, it also means that we regularly talk to the banks’ lawyers and have a good sense of what the banks are doing. Here is what we have seen and heard, and what we expect is coming.
First, virtually everyone who needed to defer mortgage payments since March, 2020 has been allowed to do so. For homeowners, the CARES Act required mortgage companies to defer payments up to one year. This law impacted 70% of all mortgages in America. Nearly anyone who was behind on their mortgage for any reason (or who could get behind) in March has been provided a year without the need to make a mortgage payment. Even those loans which were not covered by the law have generally not been pushed into foreclosure, suggesting that mortgage companies have expanded the deferments to all loans. Based on published default rates, it looks like over ten percent of homeowners have taken advantage of this program.
For businesses, most commercial lenders provided their clients at least a 90-days to defer payments due to Covid-19. While no law was in place to require this practice, most banks recognized the challenges their clients faced with a lapse in business. This was practical on several levels that are not tied to altruism. Few banks would want to have a large book of losses at once, force good clients into losses for the bank, or face a public outcry.
Deferments have relieved many people of significant short-term debt payments. Further, the federal government stopped all student loan payments through the end of the year, which frees up further debt payments for many. America’s payments on debt have been significantly reduced so far this year.
We have seen the government actions decrease defaults. Calls for financial help to our law firm went from about 25-40 per week to 2-4 calls per week through the end of July. About the same time, large law firms that file most of the foreclosure lawsuits in Ohio laid off their entire staffs. Several lawyers and staff at those firms told us in March that the banks would not make decisions on how to proceed with foreclosures through July and August. The number of foreclosures slowed to a trickle and remain limited.
Today, at the end of August, it appears many mortgage companies are preparing to allow homeowners the full time under the law without payments. At the end of that period, ending in March 2021, the banks appear to be gearing up to tack on any past-due amount to the end of the loan. This will cause people’s payments to become current. That is a good thing for homeowners facing financial harship. This is consistent with what we have seen with our calls, which are rarely regarding foreclosure.
Businesses do not have as much time, but they appear to have some more time. We have recently received calls from business owners who are being told that their banks will be allowing another deferment of 90 days, but then no more. That means that these business owners will need to come up with a solution by Christmas or face a lawsuit over any unpaid loans.
Some businesses may be given more time, but they need to have a game plan on how they will turn their business around, or reinvent it. Counter-intuitively, the businesses with the most equity in real estate might be at the largest risk of foreclosure. Rather than help a strong business survive, some banks might see an opportunity to cash-out at 100% versus wait for the market to turn and take a loss on the value. We had a call like that this week.
Business owners should be thinking of a new way forward by the end 2020. They should not just cross their fingers and hope things will be back to the way they were. Banks want contingency plans in place if you hope to get more money or time. Business owners should be showing their banks that they are thinking critically about their business, potential losses, and how they will stay in business in a new economy. It won’t be enough to run to the SBA for gigantic loans to carry a business into next year. Those have to be paid back eventually, too.
Homeowners have at least until March, 2021, and maybe a little longer. Another federal law, RESPA, requires homeowners to be behind in payments for 120 days before the bank can file foreclosure. If these loans are all automatically brought current in March because of the CARES Act, then that means July, 2021 will be when we start to see foreclosures resume.
Deferrals are good for society, as they help avoid significant losses and compounded damage from a frozen economy. While we see another big business file bankruptcy each week (especially those with big debt loads), the deferments and the extra money from the federal relief packages continue to help families who might otherwise be facing significant losses. The additional $600 unemployment payments are positively impacting the economy.
There are many industries facing significant losses, such as the restaurant, hospitality, entertainment, and travel industries. However, even those who lost their jobs in the short run have not pushed society into a massive wave of foreclosures. It appears the opposite may be happening, where less travel and less spending on things like eating out have caused families not directly impacted by Covid-19 to save money. National statistics support this.
The national savings rate has increased since March. The amount of debt on credit cards has decreased. In May, 2020 credit card debt decreased to levels last seen in 2011. Bankruptcy filings are also down by massive numbers. In Northern Ohio, filings were 33% lower this July over last year, continuing multiple years of decline. Because bankruptcy is usually a last option for people, these decreased filings mean people feel like they have some room to breathe right now.
The federal reserve is further propping up the economy through massive purchases of corporate debt. Rather than directly cut a check to some of the biggest companies, these companies are issuing bonds that the federal government is buying with few questions asked. This is allowing companies facing loss of income from Covid-19 to maintain operations and not close. This is in addition to PPP forgivable loans and significant SBA lending with much easier terms of repayment and easier underwriting. While the PPP loans are forgivable, the SBA loans will need to be repaid. So will the bonds.
The federal reserve has also kept rates low to encourage borrowing. The impact here is also to prop up the economy, and it is helping. It has created a refinancing and home-buying bonanza. For the first time in history, the average sale price in the Columbus market last month was more than the average asking price. That means, across all home sales in the region, people paid more than the price that the home was listed for sale.
All of the actions taken by our government show a few things. Most notably is how important individual people are to the economy. Consumer spending is the engine that drives revenue into businesses. It is critical to the success of the economy. The injection of income into the consumer class has propped up our country in the time of great crisis. We need to remember that when the crisis is over, too. Our policies must remain geared toward individual people, whether that means a livable wage, or decreased debt, including for education. As we can see with the actions taken so far, increasing wages and decreasing debt payments for everyday Americans have yielded great results.
The final part to this analysis is regarding the future. The policies in place today cannot continue forever. The nature of the economy is changing. While restaurant and entertainment venues will pick back up, it will not be like before. We have been forced to find alternative means of entertainment and shopping, and many new habits will be set. That will result in new online opportunities for businesses, but less brick and mortar. New business with thrive, some will end, and others will remain open with less revenue.
A vaccine will be developed and social distancing will come to an end sometime next year. Certain industries, like travel, will probably have a bump in business. However, it is not likely that the economy will return to the way it was anytime soon. Businesses that have laid off workers will have found new efficiencies and less reliance on office space. Office buildings and the infrastructure that keeps them operational won’t be needed. As people stay home more, it means less wear and tear on everything from cars to roads to business suits needed for the office. Insurance rates will decline, and so will business for personal injury and workers’ compensation lawyers. That means less corporate legal work too. The ripple effect will continue in every direction.
We need to begin preparing for next fall. While the stock market continues on a sugar high, it does not appear grounded in long-term reality. The direct economic impact of Covid-19 is dulled by the government’s current actions. However, there will be a shock to the housing market next July when foreclosures resume. Even if everything is back to normal in the economy, businesses will have changed, and the end to the deferments will cause many foreclosures to hit the courts at the same time. That could create a snowball similar to 2008-2012.
Don’t get too comfortable. Start planning now for some significant challenges ahead.