April Bill’s Day – Bills due on April 1st add to the financial strains of covid-19 | Finance and economics
TO MOST WORKING Americans, the first of the month brings both joy and sorrow. It is payday, but also when rent and mortgage payments—their biggest bills—are due. Businesses must pay out wages and rent from the revenues they have accrued over the past month. This April 1st is likely to be even crueller than usual. The spread of covid-19, and the government’s efforts to contain the virus, have forced many retailers to close shop and led to millions of workers losing their jobs. Many American households and businesses will struggle to pay what they owe.
How big is the bill? Around two-thirds of America’s 120m households are homeowners. Together they owed around $11trn in mortgages at the end of 2019. Their monthly payments will depend on their deposits and their interest rates, but using national averages as a guide suggests that around $52bn of mortgage payments might be due on April 1st. Another 43m households rent. Zillow, a property company, estimates that they paid $43bn per month to landlords in 2019.
Few corporations own their offices, restaurants or shops. Instead they rent from commercial landlords. Green Street Advisors, a property-research company, estimates that total office rent exceeds $10bn a month. Monthly retail rents are worth an additional $20bn, according to Marcus & Millichap, a commercial real-estate services and consulting firm.
Altogether, households and firms owe around $125bn. How much might go unpaid? It seems likely that the 3.3m workers who signed up for unemployment benefits in the week ending March 21st will have also sought some relief from their landlords or their banks. Economists at the University of Chicago reckon that as many as two-thirds of America’s 159m workers cannot work entirely from home. Many may lose some pay as a result.
Although their offices might be closed, many businesses might still be up and running. Those least likely to pay are retail businesses that have been shut. A slew have already said that they won’t pay up. Nike, a sportswear retailer, says it will pay half its rent in April. The Cheesecake Factory, a restaurant chain, plans to pay nothing at all.
The stoppage in the flow of rent or mortgage payments risks gumming up the rest of the financial system. But the damage done depends in large part on how flexible landlords and creditors can be. Government intervention should make it relatively easy for many households and businesses to postpone payments.
Homeowners struggling to pay mortgages will probably find that help is at hand. The vast majority of residential mortgages are held, or backed, by government-sponsored entities (GSEs), like Fannie Mae and Freddie Mac (see chart). The government has ordered Fannie and Freddie to grant forbearance to homeowners, and has imposed a 60-day moratorium on foreclosures. The Federal Reserve has said it will buy unlimited quantities of mortgage-backed securities (MBS) issued by GSEs. This support is likely to be extended if the crisis drags on.
Small residential landlords are likely to find themselves in a similar position. These own the majority of rental properties and owe $4.3trn in mortgage debt. Dave Bragg of Green Street Advisors says some 27m units, or around 60% of the rental stock, are owned by landlords who each own fewer than five units.
The commercial sector, though, is likely to have less flexibility. Most mortgages for retail and office spaces, which are worth $3trn, are taken out by professional landlords. They are usually owed to one of four groups: banks, life insurers, the holders of commercial MBS or real-estate investment trusts (REITs). Renegotiating payments with banks and life-insurance companies, which lend using their balance-sheets, might be relatively easy. But the commercial MBS market is governed by rigid rules, and REITs, which are highly leveraged, will quickly suffer if payments stop. A quarter of commercial mortgages are owed to MBS holders and REITs.
Some middlemen are also being affected in unforeseen ways. For instance, mortgage-service providers—which typically originate loans and collect payments from homeowners for a fee, and are usually an innocuous link in the chain—complain that they are running short of cash. They typically hedge interest rates by short-selling MBS, in order to lock in interest rates for new customers. But as part of its response to the pandemic, the Fed is buying MBS so quickly that the providers are facing margin calls on the losses on their hedges, before the loans for which they have locked in the rates can be issued.
For the median American laid off because of the coronavirus, it seems likely that the government will either ensure that they have enough cash, or that their landlords or bankers can afford to be flexible. But other bill-payers might be less fortunate.