Why THIS EXPERT says a DEFAULT SURGE is already on the way

Bank of America U.S. economist Michelle Meyer recently declared the United States had “officially fallen into a recession…joining the rest of the world, and it is a deep plunge.” However, that statement was actually far less troubling to many real estate investors than a follow-up to that note to investors from S&P Global, which included a warning that “a surge in defaults” is already in motion and probably impossible to halt.

“The severity of the blow from the coronavirus leads us to believe that the U.S. is entering a recession – if not already in one,” S&P Global analysts wrote. “The sudden economic reversal will bring intense credit pressure as a cash flow slump and much tighter financing conditions, as well as the simultaneous oil price shock, will hurt creditworthiness. These factors will likely result in a surge of defaults…that may rise above 10 percent and into the high single digits.”

Meyer’s predictions were also dire:

“Jobs will be lost; wealth will be destroyed, and confidence depressed,” she wrote, adding “the crisis will be short but will get worse before it gets better [after a trough in April] followed by a very slow return to growth thereafter with the economy feeling somewhat more normal by July.”[1]

Not Just Residential Defaults Looming

While there certainly could be a number of residential mortgage defaults in the aftermath of the coronavirus, the economic fallout could likely be far worse for commercial entities that are less likely to have initiatives in place to protect them from delinquency and default. For example, multiple Times Square properties are in jeopardy already after late or reduced payments in November and December of 2019 and January 2020[2].

Even if residential borrowers are granted forbearance for 60 days or more as part of the stimulus package or other FHFA programs, mortgage brokers are worried that lost jobs and reduced hours in the loan servicing sector could create a financial debacle all on its own.

“The MBA firmly believes that further action by Treasury and the Federal Reserve is needed to ensure the orderly functioning of the housing finance market…..Widespread, national borrower forbearance at the levels being proposed in response to the COVID-19 outbreak…extends well beyond any servicer advance obligations previously envisioned, and is beyond the capacity of the private sector alone to support,” the Mortgage Brokers Association write in a recent letter to Treasury Secretary Steven Mchuchin.

If there is not enough liquidity available in the servicing industry, servicers will be unable to meet the needs of the investors who back the mortgages. According to Robert Broeksmit, president and CEO of the MBA, this could cause “the whole process to break down.”

What, if anything, worries you about the real estate market today?

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[1] https://dsnews.com/daily-dose/03-23-2020/is-a-recession-already-here

[2] https://www.bisnow.com/new-york/news/capital-markets/kushner-companies-mortgage-103550

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