Pandemic Mortgage Forbearance Design: A Practitioner's Perspective: Federal housing finance assistance during COVID avoided problems that plagued similar assistance in the Great Recession.

• Author: Calabria, Mark

In the first year of the COVID-19 pandemic, I headed the Federal Housing Finance Agency (FHFA), the federal agency that monitors the giant housing enterprises like Fannie Mae and Freddie Mac that coordinate most private financing of mortgages. As such, I was responsible for designing the emergency housing payment relief program that many mortgage holders utilized in the pandemic's early months. I was determined that this relief would avoid the serious problems that had plagued housing finance assistance programs in the previous national economic emergency, the Great Recession.

COVID not only posed challenges to U.S. public health policy, but also to economic and broader domestic policy. Lockdowns, fear of exposure, and uncertainty surrounding both the economy and the government's evolving response resulted in the sharpest labor market decline in American history. Total nonfarm employment dropped by 22 million jobs from February to April 2020. In comparison, just under 9 million jobs were lost in the Great Recession, and that occurred over two years, from 2008 to 2010.

With job loss often comes housing distress. The usual mechanism for helping workers weather a period of joblessness is the unemployment insurance (UI) system, a partnership between states and the federal government. But UI requires ongoing demonstration that applicants qualify for benefits, and that takes time to compile and process before benefits are received. Whether the job market would recover in three months or three years, policymakers during COVID needed to create a financial bridge to stabilize families' financial health, at least until the unemployment benefits kicked in.

The UI system typically covers about half of lost earnings and about half of all workers. There are a variety of reasons why some workers are not covered, but the most common is that they are exempt because they are self-employed or part-time workers. The duration of coverage is within the discretion of each state government but is generally less than six months. During severe economic downturns, however, Congress will typically increase both the percentage of lost earnings that are covered and the duration of coverage. Congress followed this pattern during COVID and extended coverage to some workers normally outside the UI system.

For typical renters and homeowners, UI is generally sufficient to cover monthly housing expenses. But because UI benefits are capped, recipients with particularly high housing costs may have trouble fully covering those costs. Moreover, there is no requirement that those receiving UI spend it on housing, although most appear to do so. Still, without UI, it is likely that foreclosures and eviction rates would be two to three times higher during an economic downturn.

Because UI benefits are often slow to reach the unemployed, that can leave those with little savings struggling to cover their housing costs, at least temporarily. For policymakers, the solution to this problem is to provide borrowers with loan forbearance, not forgiveness. Forbearance gives borrowers a "time-out" on their monthly payment, allowing them to add missed payments back into their loan balance so the money will eventually be repaid. The hope is that the borrowers will be back on their feet within a few months or else they will have started to receive UI benefits, so they can resume their mortgage payments. That is what we aspired to do during the COVID emergency.

LEARNING FROM THE MORTGAGE CRISIS

During the 2008 financial crisis, I was a senior adviser to the U.S. Senate Committee on Banking, Housing, and Urban Affairs. From that perch, I observed up-close federal policymakers' efforts to provide relief to mortgage payers. I became convinced that much of the federal response was poorly structured, especially the mortgage assistance programs, the Home Affordable Modification Program (HAMP) and the Home Affordable Refinance Program (HARP). When we began work on COVID mortgage relief, I was determined to not repeat the design flaws of HAMP and HARP. We would do it right, or at least better, this time.

I also wished to avoid structuring assistance in a way that would discourage work. The Great Recession witnessed the weakest job growth of any post-World War II recession. This was puzzling because of the seeming disconnect between overall consumer spending and the job market. The economy was weak in the immediate aftermath of the 2008 financial crisis, but consumer spending recovered relatively quickly. Normally, one would expect such an increase in spending to translate into a similar-size recovery in employment. But that didn't happen.

Another puzzle was the breakdown in the usual relationship between unemployment and job vacancies. Job postings steadily increased once the economy hit bottom in the summer of 2009, but with little effect on the unemployment rate. Many in the economics profession, at least the professional forecasters, saw the weak job market as a function of weak demand in the overall economy. I was among the minority of economists around 2009 and 2010 who believed that we were instead facing structural changes in the labor market. During a Senate hearing at the time, I suggested that mortgage assistance programs were locking workers in place, perhaps discouraging moves from weak job markets to stronger job markets. The Great Recession, for instance, was one of the few recessions in which mobility decreased. Recessions...