The coronavirus has led to numerous job losses since March and many households have now reached a point where they are struggling with financial strain. As a result, many homeowners have delayed mortgage payments throughout the COVID-19, with some even seemingly taking advantage of the government’s bailout program. Regarding the bailout program, President Donald Trump has signed a CARES Act proposal on allowing the extension of borrowers to delay their payments up to a year. In addition to that, mortgage repayment plans can also be modified.
The remarkably high unemployment has consequently brought more than 4.1 million homeowners to either skip or make reduced payments in their forbearance plans according to the latest data from the Mortgage Bankers Association. It is a representation of 7.3% of all active mortgages according to Black Knight, a mortgage data and analytics firm. That accounts for up to $841 billion unpaid and is equivalent to 6.1% of all loans.
The delay of loan payments from users forbearance plans can have short term as well as long term effects on the four main parties, namely borrowers, banks, the government, and both foreign and local property investors.
Borrowers benefit from having an extended period to pay back their loan payments in the short term. However, in the long run, it is a rise of interest burden meaning their overall loan repayment will rise according to the time they have delayed paying back. Furthermore, under the protection of the government’s bailout program, they will have a low incentive to find a job and earn money to repay their loan. Hence, this does not improve productivity and on the contrary, reduces their competitiveness.
Banks, in the short run, suffer as they will receive money from their debtors later than the proper date and thus will have to bear their opportunity cost. These costs include the opportunity to invest in other profitable investments. In the long run, banks do benefit from interests their borrowers' pay, and also the more time the borrowers are allowed, the lower the risk of bad debts.
Governments, in the short run, increase their popularity as people are satisfied when they benefit from the government’s mortgage bailout program. In the long run, the government needs to make use of further resources to increase households' productivity to repay their loans.
Property investors do not benefit anything in the short term. In fact, property prices may even drastically drop. However, the benefit or loss generally depends on the wellness of the country’s economic situation after this COVID-19 pandemic.