The days of swift evictions are over after Covid
Mental health is moving to the forefront in the discussion of what action lenders should take when people are no longer able to pay back their debts. One lasting legacy of the pandemic could be that repossessing a home becomes a last resort rather than a first response and that will have consequences for investors in mortgage-backed products.
Under a new UK government scheme, creditors will be unable to take legal action against debtors who qualify for a “breathing space” of 60 days if a debt relief adviser refers them. If the debtor is receiving mental health treatment, the period lasts as long as the treatment plus another 30 days.
When considering that 12.1% of adults already receive treatment for mental health, the potential for lengthy freezes does not seem low.
Some of those people are presumably also among the 31% of British workers who live pay cheque to pay cheque, giving them little financial wiggle room if furlough schemes run out and a job loss becomes permanent.
And it is not unimaginable that the majority of the people who are not already receiving treatment would qualify for it and, by extension, an undetermined “breathing space”, if they suddenly found themselves at risk of losing their home.
Even after the global financial crisis, it is still commonly heard that the most effective solution for a borrower who can’t pay is foreclosure. After all, borrowers are not better off for accumulating more debt and staying in a home they can no longer afford.
But the pandemic has finally changed the conversation. Coming out of the crisis, it will be tricky for a lender to chase mortgage borrowers through the court who otherwise had a stable income and a reliable job before the pandemic.
If a borrower finds themselves unable to pay through no fault of their own, evicting someone who has a long history of paying their mortgage on time makes little sense.
Lenders are in a tough spot, though. They’ve been asked to grant payment moratoria unilaterally without asking too many questions, with everyone hoping a group of loans which people aren’t paying don’t eventually turn into permanent arrears. Can they afford to sit on their hands for years if sectors like travel, tourism and hospitality never again provide the employment opportunities seen before the pandemic?
But the erosion of creditors' rights reflects the shifting preference of regulators and lenders away from foreclosure and towards forbearance.
It is not just a UK phenomenon. The change in attitudes is also underway in Ireland, where the burden of proof is rising for those used to a quick turnaround when mortgages go unpaid. Across the world, the payment moratorium will likely become the standard tool rolled out whenever any unforeseen crisis — health-related or otherwise — leads to financial troubles.
This revolution in thinking represents a significant departure from the response to the last crisis, which the mortgage market tumbled into when underwriting standards were considerably looser.
In these days of tightened underwriting, most market participants agree that the ideal solution would be for everyone to repay their loans, even if this takes longer than first agreed. The virus has delayed many forecasts of debt repayment, but patience is still the best approach. Borrowers whose jobs have been put at risk because of the pandemic are unlikely to find work sooner because of an eviction.
If investors are confident that the loans backing the RMBS notes they invested in were offered to people who could afford them, then the answer to the question — forbearance or foreclosure? — should not be a difficult one.