The US government’s call for special servicers to forebear borrower defaults under a new $2 trillion stimulus package could cause property prices to plummet, raising the risk of a scenario “worse than the global financial crash,” according to Jim Costello, senior vice-president at data provider Real Capital Analytics.
The Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted on March 27 to support the pandemic-stricken economy by offering relief measures such as loans, grants and tax changes to businesses, individuals and families.
Under Section 4023 of the new legislation, real estate borrowers with a federally backed mortgage loan may request forbearance from their special servicer for up to 180 days, with the option to extend for a further 180 days, if they are experiencing financial hardship on the back of covid-19. During this forbearance period, the servicer cannot charge or collect any fees, penalties or interest beyond what could be charged if the borrower made all payments on time.
But Costello’s main concern about the CARES Act is that it places the “onus” of the forbearance onto the special servicers, arguing that it will create a capital draw for those who are not ready for it.
“It will see the largest fund mandates in history placed onto businesses as opposed to the government itself stepping in to deal with this,” Costello said during a webinar hosted by real estate analytics provider RealPage last week. This would create “blowback” as servicers would be less willing to hold that debt and it would consequently become more difficult to originate loans, he added.
A top priority should, therefore, be to protect those servicers and ensure they have access to a liquidity line to maintain the management of those loans.
He added: “It is critical that that is solved. Otherwise, we could see a freeze in lending which could result in a severe decline in prices.”
If banks pull back on lending because servicers are less willing to hold debt, many borrowers would be unable to refinance and therefore may need to sell their assets at significant discounts, Costello explained.
Without such protection for special servicers, the “turmoil of the real estate sector” could spill over into the financial sector, potentially leading to an economic downturn that is, Costello said, as “bad, if not worse, than the global financial crisis.”
Costello did give credit to the US government for how quickly it passed the CARES Act in comparison to the economic stimulus plans that were enacted following the global financial crisis. He was initially optimistic about economic prospects in the US: “I thought it would be a real sector shock with a down period and then a ‘V’ recovery, but if we kept lending, everything will be fine.”
However, his concerns over the CARES Act’s impact on special servicers and lending origination made him believe a recovery was more likely to be drawn out.
RealPage economists Jay Parson and Greg Willet also participated in the webinar.