Today I learned about a paper published by Pamela Foohey (Indiana University Maurer School of Law), Dalié Jiménez (University of California, Irvine School of Law; Harvard Law School – Center on the Legal Profession), and Christopher K. Odinet (University of Oklahoma – College of Law).
They nailed the issue squarely. If you provide relief with the requirement of repayment it is simply a different form of credit. And people unable to make the payments today have no confidence they will be able to make them tomorrow.
Let me quote from the paper:
“To support individuals, Congress had two basic options. It could enact policies that provided direct and meaningful financial support to people, without the necessity of later repayment. Or it could pursue policies that temporarily relieved people from their financial obligations, but required that they eventually pay amounts subject to payment moratoria later. The first option would lift up Americans and forgive them for a situation beyond their control. The second option would provide Americans with a moment to breathe, during which they could try to fortify themselves for a coming onslaught of uncertain payment obligations that many likely still would lack the resources to meet.”
“The assumption that people will be able to repay credit masquerading as “relief” in the wake of the pandemic is an even more serious error that will have enduring negative consequences. In the long term, direct and meaningful support that carries people through the crisis, and that not merely gives them a temporary crutch, is critical to ensuring that the people who fuel that American economy can get back on their feet after the crisis abates. In the short term, it is crucial to stymying the spread of covid-19 and abating the health crisis so that the United States can recover as quickly and as safely as possible.”
A Payment Holiday Always Comes at a Price
People will generally place more weight on today than tomorrow. And I understand that when you can’t make the rent, mortgage, car, or credit card payment that the ability to skip the payment seems like a blessing. But is it? Does it just push the inevitable payment issue to tomorrow?
“If the 2008 financial crisis provides any clues, many mortgage servicers will opt to require a lump-sum payment.”
“Although this may seem like a fix, it is merely a band-aid, and probably not a very effective one for many people at that. Problems lie in the subtleties. Forbearance does not mean forgiveness. Homeowners have to pay deferred amounts at some point in the future. The CARES Act does not provide for when these missed payments are due. Instead, servicers are left to decide when the deferred payments are due. Servicers could work with homeowners to revise their loans to provide for sustainable and realistic payments, such as tacking on missed payments to the end of the loan and extending the payment term. Or they could require that homeowners pay the missed payments in one lump sum at the end of the forbearance period. With varying levels of government agency guidance, each servicer will adopt its own method of deciding whether a homeowner qualifies for a loan modification and what that modification will look like.”
If you are interested in this sort of stuff, the full paper can be found here.