[Editor’s note: Originally published on Linkedin.]
COVID has demonstrated how fragile and interdependent many of the systems are that we know as “daily life.” Not unlike a Jenga tower, if one piece is removed, the entire structure can crumble. In this brief, I will make a radically practical policy suggestion for how we can assure that one critical piece in the tower, housing, can be stabilized through federal policy so that it does not contribute to structural collapse.
The housing finance system has vast complexity to it, but it can be boiled down to the following basic sequential transactions that sustain it: renters and homeowners with mortgages pay landlords and lenders monthly, who in turn pay their investors and creditors.
When enough renters and owners can’t or don’t pay their obligations in a relatively short time period disrupting the flow of payments further down the pipeline, then the whole system faces jeopardy. This is the scenario we are currently facing.
In 2009, the federal government response to the housing market collapse can be characterized as a “save the institutions” approach. Although there were consumer-oriented programs such as the Home Affordable Refinance Program (HARP), they were generally too little, too late, and too complex to navigate. Millions of Americans lost their single-family homes, and millions more suffered as rental housing became less and less affordable in many markets during the recovery of 2010-2019. Government poured billions of dollars into the private institutions that finance housing, while millions of homeowners were displaced and the market was “cleansed,” allowing many that participated in the financial collapse to re-enter the market and reap billions in profits refinancing with different owners the very same properties that had been previously leveraged. This was not our best effort at policymaking that supports a sense of the American Dream that we often reference when it comes to housing in this country.
In 2020, we need a major “save the citizen” approach that also will benefit a healthy and robust housing finance system. I am proposing a relief program that is targeted at the foundation of the housing value chain: the renter and mortgage payee. If our goal is to stabilize people’s housing not just for their own financial security and well-being, but also so we can assure that the most number of people can properly socially isolate themselves until we return to an all-clear mode, then we need to provide immediate financial assistance to pay rent and mortgages that will keep renters and homeowners in compliance with their financial obligations, and therefore housed. Landlords and mortgagors will continue to receive their full payments and their investors and creditors will continue to receive whatever is due them. Americans remain housed, the housing finance system remains intact, and it buys us time to get to a more permanent solution.
One-time payments of $1,200 on a means-tested basis are not going to do the trick. Aside from being too little and too late for many, this money is likely not enough to cover the housing payment even if it was fully dedicated to that, and secondly it is likely to be used for other immediate needs such as food and medicine.
Under a proposal I am calling the Housing Emergency Loan Program (HELP), the federal government will provide every American with access to a low-interest loan for up to 12 months of their housing costs (monthly rent or mortgage payment) that they do not need to pay back until the end of a 10-year term (sufficient time to pay back small amounts over time). In order to assure that the money is used to keep people housed, the payments will go directly to landlords or mortgagors and, to keep it relatively simple, the loans will be made on a quarterly basis, thereby covering three months of housing payments. Furthermore, this loan program should be available to anyone who applies regardless of income. Means testing creates two distinct problems. First, it greatly slows down administration and increases costs (someone has to do the verification and compliance). Second, we are currently in a crisis that has put many families whose incomes previously may have put them squarely in the middle or even upper income quartiles on shaky ground. If suddenly a family loses both its earners and there is no immediate income then why would we want to punish them for their prior economic success as they face financial ruin and possible eviction moving forward?
HELP is designed to be effective, simple, and executable. Because it is a loan, the government can expect to receive this money back in 10 years. Rather than a giveaway, a loan with a very modest interest rate of 50 bps is likely to diminish fraud and abuse. Since the Fed has indicated its willingness to print money to keep the credit markets afloat, let’s use that same spirit (and magical printing press) to provide renters and mortgagees with credit that can save the system from the bottom up, at least until we get through this very uncertain period. Borrowers would self-certify their rent or mortgage payment amounts. They would be less likely to inflate these because it is a loan that must eventually be repaid. Plus, since the money does not come to them but rather their landlord, there is little incentive to cheat.
In order to make this work, the program would require an online process that enables efficiency and accountability. Fortunately, we have the information technology systems that can make this work. A borrower would apply for the loan (again, minimum of 3 months of their housing payment) and identify their landlord using the landlord/mortgagor’s EIN number, which the government would require those entities to provide to their tenants/mortgagees (they are public record anyway). The borrower would be assigned a unique account number. That account number would then be shared with the landlord by the tenant and the landlord could then claim the proceeds in the account, at which point funds would be transferred to the landlord/mortgagor electronically. If a tenant sets up an account then a lender/mortgagor would not be allowed to refuse the money or take action to remove the renter/mortgagee for the period covered by the loan proceeds. All of this can be set up relatively quickly using off-the-shelf technology that would not require a vast bureaucracy.
What would all of this cost the government? Well, since it is a loan, in theory, nothing. But in terms of near-term outlays, let’s assume that half of all mortgagees and renters avail themselves of the HELP program for 6 months’ worth of housing costs. Assuming 40 million renters paying an average monthly rent of $1,500 ($180 billion in loans) and 50 million mortgagees with average monthly payments of $1,100 ($165 billion), that’s a total of $345 billion. Further assuming that the program costs $1 billion to operate over 10 years, the compounded repaid interest of $17 billion would accommodate a default rate in the 3-4% range for the program to break even.
The HELP program would take tremendous pressure off the housing system while we work to find longer-term solutions for a more stable and rational housing market that is not so vulnerable to COVID-like events. Most importantly, it would keep millions of Americans in their homes during this tumultuous period and contribute to the nation’s general welfare, which requires people to stay at home – but only if they have one.
Whatever the governmental response is to keep people housed, I hope it incorporates the following principles: 1) keep people in their homes (both rental and homeownership) without disruption AND ensure the solvency of their landlords and mortgagors, protecting both citizens and the housing finance system equally; 2) provide resources that are quick and easy to access with minimal administrative requirements that are not overloaded with fear of fraud provisions; and 3) use technology to provide expediency, transparency, and accountability.