he escalating Coronavirus pandemic has created uncertainty in almost every aspect of daily life. Americans are primarily concerned about the health and safety of their family members, but closed businesses and falling stock markets also create concern about our longer term financial wellbeing.
Public safety needs to be the first priority of every leader in America. In addition to these public safety responsibilities, our leaders in Washington must also address concerns about the economic health of our country.
Several stimulus policy proposals are being floated by the White House and Congressional leaders.
Unlike the bailout measures from the 2008 financial crises, we believe that stimulus spending should be directed at the American people instead of big American companies.
We are concerned that many of the proposals currently circulating in Washington focus on bailing out major industries like airlines and hotel chains, and blanketing everyone in America with a relatively modest sum of money.
We believe that, to be effective, the stimulus measures taken need to have an immediate and material impact on consumer cash flow and consumer confidence. We are skeptical that industry bailouts or a onetime check in the mail will achieve these goals. Instead, some of the measures we would like to see include mortgage payment waivers, student loan debt relief, enhanced unemployment insurance and small business loan guarantees.
GNMA, FNMA and FHLMC are government agencies that securitize mortgages into mortgage backed securities (MBS) and guarantee the resulting securities. Approximately 70% of all home mortgages in America are guaranteed by one of the three agencies. The mortgages they do not guarantee are typically “jumbo” mortgages on houses of the very wealthy. Waiving payments on GNMA, FNMA, and FHLMC mortgages is a direct benefit to the American middle class.
Middle class homeowners whose incomes have been impacted by the pandemic will know they will be able to keep their homes. More fortunate homeowners whose incomes are unaffected will have more cash to order take-out from restaurants and support local charities and businesses.
Suspending payments on these mortgages will require the Federal government, as guarantor of the MBS, to make interest payments to the MBS investors. However, to the extent that waiving mortgage payments reduces defaults and foreclosures, the government may have fewer mortgage guarantee costs and could save money on this program.
The Federal Government holds over $1.5 trillion in student loans at various interest rates. By reducing the Fed Funds rate close to 0%, the Federal Reserve has made it possible for the US Treasury to borrow without having to pay any interest costs.
These savings should be immediately passed on to student loan borrowers by reducing their interest rate to the Fed Funds rate, currently 0%. The new interest rate should be accompanied by a 6 month deferral of all principal repayments obligations, relieving these borrowers of any loan payment obligations for the next 6 months.
Student loans have long been a burden for younger workers. Outright debt forgiveness faces significant political and legal obstacles. These obstacles can be avoided by simply changing the interest rate on these loans. This proposal eliminates all interest costs for as long as Fed Funds is at 0%.
Borrowers can also expect that, even when the Fed Funds rate increases in the future, their longer term interest costs will be greatly reduced under this proposal. The combination of no payment requirements for 6 months and greatly reduced long term obligations improves both immediate cash flow and longer term confidence for these borrowers.
This proposal effectively costs the government nothing since the rate students pay on these loans is equal to the rate the government is paying to borrow. Principal repayments are deferred but not eliminated. The government forgoes the profit it could have made on the difference between the student loan interest rate and its own borrowing costs, but the government shouldn’t be profiting at the expense of young workers very negatively impacted by a quarantine.
Waiters, cabbies, freelance workers, and many others in similar “gig economy” jobs may be the most severely impacted by quarantine measures. These workers often do not qualify for unemployment insurance payments. They will only benefit from debt relief measures to the extent that they have mortgages or student loans.
Instead of sending $2,000 to everyone (two $1,000 payments across two months), we believe the Federal government should provide a larger sum to a smaller group of the most vulnerable workers.
An emergency unemployment benefit program should be established that covers all workers who are not being paid during the crises and who do not qualify for existing state unemployment insurance programs. These payments should be enough to pay rent, car payments, insurance, food and other costs that are typically far more than $1,000 per month.
We are very supportive of the Administration’s proposals for small business loan guarantees. Quarantine measures are having a drastic impact on small business cash flow. These small companies often have only limited access to the financing they may require to stay in business.
A loan guarantee program devoted to small businesses can assure that banks are willing to extend credit to these companies. Access to credit may be the key to the economic survival of these companies and the employees who work for them. As these companies recover along with the economy, these guarantees may not be needed and the cost to the government prove to be inconsequential.
The US economy entered this medical crisis with a great deal of momentum and without the systemic mortgage debt problems that made the 2008 recession so painful. We are hopeful that our medical professionals and quarantine strategies will contain the Coronavirus within the next few months. Washington needs to establish policies, right now, that allow people to keep their homes, their cars and their businesses during this difficult quarantine period. The right set of policies, focused on bailing out the American people instead of big American companies, could position the American economy to recover quickly once the pandemic has passed.
