Suspending Mortgage & Lease Payments for the Coronavirus Pandemic
The waves of mass quarantine orders throughout America are raising deep concern among working people about where their next paycheck is going to come from. The closings of bars, restaurants, clubs, gyms, factories, and many other workplaces has left many people in the vulnerable, “working class” portion of the population without a way to earn a living. While federal and state governments are stepping in with various relief packages to help the unemployed, the stress of finding money to make a lease or mortgage payment is weighing heavily on many people. Evictions and foreclosures can ruin lives and businesses. Finding a way to keep people and corporations in their homes, offices, and factories while we deal with the health crisis is critical to maintaining the well-being of the American people and the economy.
Because there is no reliable end in sight for the mass quarantine orders, the federal government should suspend property taxes, evictions, and real estate debt payments (mortgages and leases) for people, businesses, and other institutions until the coronavirus pandemic has ended. The average household spends about 25 percent of their income on housing. Businesses and other institutions also spend a large proportion of their income on mortgages or leases. Suspending leases, mortgages, and evictions will help to stabilize the lives of millions of Americans at a time when their lives are rocked with the instability of sickness and death.
To my knowledge, a law suspending evictions and real estate debt payments has never been enforced in the United States. While the effects of suspending evictions are relatively straightforward, it is unknown how a real estate debt suspension would affect the economy. Theoretically, there are two major countervailing effects a real estate debt suspension would create:
On one hand, if no one can collect on a real estate debt, banks could not collect on landlord mortgages; therefore, most landlords would have little need to collect rent from lessees. Landlords usually use lease/rent payments from tenants to fund mortgage payments on the property they are renting out. Banks are not allowed to collect on the mortgages of individual homeowners, corporations or institutions while the suspension is in effect, either. As a result, a massive source of financial stress in an uncertain time would be lifted from individuals, businesses and institutions.
On the other hand, landlords, real estate companies, and banks rely on the income provided by real estate debt collection to fund operations that are essential to the well-being of the public. A bank that provides mortgages also likely provides short term debt and financial services to essential service providers like hospitals, grocers, restaurants, transporters, energy companies, and other banks. Additionally, corporate landlords employ many people and need their income to stay in business, and Individual landlords often use tenant payments to supplement or completely fund their life. If mortgage collections are suspended during the pandemic, banks, real estate companies, and individuals will need a cash infusion from some other source to continue financial services, employment, and their lifestyle, respectively.
The Federal Reserve and the Treasury should work together to provide the cash infusions necessary to make up for the lost lease and mortgage income by individual and corporate landlords and banks. As we are currently doing with other economic sectors impacted by the quarantine, mortgage and lease holding entities would get support from the government until the crisis ends. The most straightforward way of accomplishing this is to just have lease and mortgage holding entities file a claim with the government.
This claim would enable the Treasury to pay their tenants’ relevant portion of a lease or mortgage. To sustain them in the inevitable interim period while claims are being processed and payments dispersed, small landlord corporations would receive no/low-interest loans from the small business administration, while large corporations would receive no/low interest loans from the Federal Reserve. As has been proposed in existing legislation, a $1,200 (+$500 for each child) stipend for households would help tide over individual lease holders until the lease and mortgage reimbursements can be dispersed. For all unemployed individuals in the economy, full wage/salary unemployment benefits would be provided as well.
Critics of this strategy might argue that these Federal Reserve and Treasury cash infusions into banks and corporations are ill advised because such government intervention is coddling and inflationary. They would be wrong. Several good counter arguments to this assertion can be made.
Regarding potential inflation: Suspending mortgage payments for individuals, corporations, and institutions will add more certainty to the economic outlook. The market would have some assurance that end consumers aren’t going to be thrown out of their homes and corporations evicted out of their offices. With this ensured stability, investors, consumers, and lenders will pull back less of their activity during the pandemic. As a result of this increased level of investment, consumption and lending, less cash would have to be infused into banks and corporations to keep them afloat. With fewer, more orderly emergency cash infusions, the predictability of the economy would increase and raise productivity (relative to current crisis levels). Increased productivity cancels out inflation.
Even if inflation were to rise the Federal Reserve and Congress know how to combat inflation. Inflation is beaten by raising the costs of lending for banks (which reduces lending to consumers, ebbing consumption) and/or raising taxes to remove money from the economy. These anti-inflationary methods would be pursued no matter what strategies were used to stabilize the economy during this pandemic.
With respect to the “moral hazard” of coddling businesses and individuals that have been “irresponsible:” It is important to remember that—much like a war, a pandemic is an extra-ordinary event that requires extra-ordinary responses. Coddling people and businesses for a couple months or less is not going to turn the United States into communist Russia. Private companies will still exist after the pandemic. It is only that evictions and real estate payments are being suspended for the moment to make life that much more certain for people during an extraordinarily difficult time.
Note that during World War II the United States government heavily intervened in the affairs of the private market for the purpose of winning the war. At the start of the war, food commodities like sugar and coffee were temporarily banned from sale to the public and were thereafter rationed. Commercial food producers (bakeries, cereal makers, creameries, etc.) were regulated to only purchasing a 70% quantity of their usual raw agricultural materials. Complex items, or items requiring metal like televisions, metal furniture, tin cans, and automobiles could either not be purchased at all, or required coupons from the government to purchase. The United States also effectively compelled large companies like General Motors and Ford to produce tanks and bombers.
In arguably our finest hour, the United States government required its people and corporations to turn their commercial operations away from the pleasures of internal consumption and toward the war effort. And the public was more than happy to oblige, because they understood they were suffering these inconveniences for the good of their country. And today they are doing the same by cancelling vacations, graduations, weddings, and their day to day life so their neighbors can survive this “invisible enemy.” I am asking for nothing more than a similar sacrifice from America’s landlords and mortgage holding banks.