Quarantine: Day 7...maybe
My days have all melded into one. For someone who has worked seven days a week for almost his an entire adult life, I never thought the time would come where my mind was so numb from doing nothing that I could forget the day of the week. I guess I really need to start worrying when I have no concept of time on the forgotten day, at that point I might as well be living outer space where time and day give way to the Twilight Zone.
But, despite how I would normally feel after a week of doing nothing productive (other than eating, writing and playing with my kids), I am relatively at peace. Not because there is anything tranquil or relaxing about the current state of affairs and uncertainty to follow. No, friends, that will still keep me up nights. The main reason I was able to come to grips with that today is because it finally became clear that society as a whole has less of an idea what is going on than I do. That starts at the top of our dysfunctional national government and rolls down hill like a brown snowball to the ignorant people who want to believe someone will save us or focus on a single person to blame.
Life ain’t that simple people. There are plenty of people to blame for what is going on right now. Honestly, as much I would love to direct vehement rage at the politicians like I usually do (for those who enjoy that, I promise it is still coming just not primary) I have to blame we the people first. That is the first time I have ever used that phrase in a negative way or lumped myself into a category with the masses in that context. We spend far too much of our time skimming articles and believing ourselves to be experts. We waste the time terminally ill people wished they had posting stupid memes on social media about who has the funnier reaction to tragedy. We (I am going to exclude myself from this group) go to sleep at night believing that out government and elected officials are going to save us.
I will back track that last statement for context. As soon as it was announced that certain states were implementing financial safeguards for residents, I write about New York specifically, there were people who sought to assuage all concern for how people were going to pay their bills. The Governor in all of his infinite wisdom allowed for 90 days of not paying mortgages and put a moratorium on evicting tenants who could not pay their rent due to the crisis. I almost fell into that herd of cattle grazing my way off the cliff in the belief that it could be true.
However, something nagged at me — like a gnat in the eye that you just can’t get out — telling me all that glitters is not gold. I sure could have benefited from not paying the mortgage on my house for 3 months given that I am almost entirely out of work without pay. That benefit would have compounded exponentially if I add in the mortgages on my investment properties where cash flow is sure to be drying up. But I refused to explore the fine print or try and figure it out, almost certainly because I knew it would be met with disappointment.
In the last few days my phone has been ringing off the hook. (Not for facetime, that’s my six-year-old’s iPad, but I digress.) It was from a range of people, friends to colleagues to business associates and all the way down to financial service customers I had back in the day. I have never received so many concerned inquiries on any single topic as I have about how to handle this mortgage forgiveness situation. To provide a little background, my expertise has always lied in money and finances. I dropped accounting for finance because I struggled to add two plus two unless there was a dollar sign in front. Over the last twenty years I have advised countless people on how to save money or navigate the murky waters of the American banking system.
With that said, I have never been one to advise off-handedly or to say I don’t know if the answer is simple enough to find. So, today I decided that the best possible way to help them answer their questions was to try it for myself. And that is when I realized just how fucked we are as a country and a people. It is a crime for companies to participate in false advertising with potential lawsuits ranging in the millions of dollars. But for our state and federal government it is a routine business practice that we should all embrace with arms wide open.
Before I dive into the result, let me bore you with some simple mechanics as it pertains to the world of mortgages and loans. There are two common mechanisms that a consumer can tap into when suffering from a financial hardship.
The first is known as “forbearance” where generally the amount you owed is deferred until a later time, at which point you will generally experience higher monthly payments as a penalty for not paying all along. This is widely popular in student loans, and for obvious reasons. A student can afford more at a future date after they have finished studying and are making a decent wage.
The second is commonly referred to as a “modification” and this is much more of a process than a forbearance. Why? Because the lender will require people to jump through hoops in order to qualify, there are no set guidelines dictating who is applicable and who is not, and the underlying collateral is usually real property, which makes it more attractive to the lender for you to actually default. But all of that aside, a modification generally results in any missed payments, plus interest and fees, getting added to the back end of your loan.
What does that mean?
Well, simply this. In a forbearance of 90 days, you will most likely owe every payment missed (or a substantial chunk of it) after your so-called “grace period” is over. In a modification, all of your missed payments, interest and fees will just prolong how long you have to keep paying on that loan. If you are in a temporary hardship, but were also living paycheck to paycheck prior to it getting out of control, which of the two do you think would be better?
Think long and hard about your answer to that question because I am about to paint you a picture. Not of a Jared Kushner type land baron (who happens to be seeking mortgage relief on his properties while not allowing his tenants any rent relief — sorry it may sound petty but speaks volume to all of those doing it) but your every day homeowner who was just squeaking by on their 9-to-5, when they were gainfully employed 100% of the time. Now take that homeowner and reduce their salary by 50% to 100%. They are “absolved” of their mortgage for 90 days but must still keep food on the table, utilities in force and all of the other household expenses that come with it. In what world are they going to be able to repay four months of payments in one shot when their “grace period” runs out?
Hopefully you all thought about and answered the prior question. I now ask you, which of these options do you think my (and highly likely all others) mortgage company offered me as part of this relief? If you said modification, bless your soul. You just entered my inner sanctum. If you said forbearance, I have to question your understanding of the concepts just laid out or wonder whether or not you know more about economics and finance than myself and a host of others.
Of course they did not offer the logical choice, they offered forbearance. Assume the nationwide average mortgage payment is $1,000. That means anyone who needs this relief will be subject to a $4,000 payment in July or they must embark on an arduous and convoluted appeal process, put their credit on the road to ruin, or incur even more debt to save their most prized asset in the world. Does this sound like anyone thought it through, or along the lines of the Federal bailout that gave us copper while giving corporations gold?
To cut off many, if not all, arguments about why a “modification” could not just be made the mandatory choice I will dissect that argument. We are no longer in an environment where every single request for a modification needs to be approved by a bank or financial underwriter. That time passed when there was a select and discriminate criteria that determined who was eligible. As a career banker, I understand that concern, the threat of apparent impropriety or favoritism is one that costs institutions more in fines and penalties than the loss of payments. Just about everyone is in the same boat right now.
And if you are sitting home worried that someone who has the money to pay may be getting a modification by making the process more uniform I would outwardly question your net worth, political allegiance and IQ. If the whole world is drowning and you and everyone else have your lifeboats, but choose to get upset that someone got a larger one, there is something wrong with you as a person. If you are a financial idealist who believes that my concept corrupts the underlying structure of our debt system, read on.
I, nor should anyone lose any sleep over the mortgage companies having to absorb 3 months of missed payments. And no, I am not saying they are not entitled to get paid. Everyone who has a mortgage knows they are obligated to pay, and most like myself should be fortunate we have a roof over our heads. But there are dirty secrets that most people are not exposed to that industry insiders know all too well.
Let’s start with how 95% of mortgages come to be in the first place. You may think that your bank, broker, or servicing company gave you the money to buy that house and you are paying them back. FALSE! The federal government has agencies such as FANNIE MAE, FREDDIE MAC, etc. who almost instantaneously buy your mortgage from the firm who issued it. That means they were paid every cent they lent you, before you even made your first payment in most cases. That company now simply serves as the intermediary to take your payment and forward it to the federal government, a process where they make money at every stage of the game.
If you are feeling a bit confused, let me sum it up. Your mortgage is most likely owed to the US government. Therefore, there is no reason for all of this back and forth bullshit with individual servicing companies instituting their own rules and overlays to the existing rule of law. There is no reason that mortgage payments cannot be “modified” as opposed to “forbearance” as hardly any private companies stand to lose a dollar. And, as far as I’m concerned, those companies who do hold their mortgages on their own books without federal subsidy (few and far between) can simply take a short term bridge loan from the federal government at virtually negative interest rates, or tap into the corporate bailouts currently being offered.
Think back to my earlier landlord — tenant analogy. But keep in mind the creditor that the mortgage holder owes the money to. Under the current rule of law, a rule that was born from an ineptitude to govern, everyone wins but those in the middle. Who are those in the middle you might ask?
Well, if you haven’t figured it out yet friends, it is you and me. Ask yourself these questions:
1) Do I currently receive food stamps or government assistance of any kind?
2) Do I have enough money in the stock market to care?
3) Is my family income below 20k a year?
4) Is my family income over 1mm per year?
I used rough ranges, but the premise is the same. If you answered no to all of those questions then you my friend fall into that middle class where you will get screwed from top and bottom.