Bail out tenants and owners, too

The federal government recently introduced a plan to encourage businesses to retain workers by subsidizing 75 per cent of their wages. By providing laid-off and self-isolating workers with an alternative to employment benefits it should help limit social, economic and financial disruption from the pandemic. Rather than let the economy tailspin, the hope is to engineer a successful recovery once the virus is contained. If business activity and consumer confidence vanish, getting the economy back off the ground will be hard.

We need to expand this plan to the real estate sector. For many newly laid-off people, neither expanded Employment Insurance nor the new Emergency Response Benefit will be enough to cover rent or mortgage payments. But homeowners in Vancouver and tenants in Toronto typically have much higher monthly obligations than those in Moncton and Trois-Rivières. Issuing the same federal cheque to everyone would not be fair. Commercial tenants are just as diverse: their ability to pay rent today depends on how hard the virus has hit their business and that varies from case to case and region to region.

On the positive side, banks rebuilt their capital over the past decade and most commercial landlords, because of strong recent growth, have resources to deal with temporary difficulties. But the scope of the current crisis is unprecedented: large numbers of homeowners could soon stop paying their mortgages, while many real estate owners could default on their commercial mortgages as both tenants stop paying rents. This would force banks to take large writeoffs, quickly depleting their capital and potentially throwing the country into a financial crisis.

Such an outcome can be avoided by providing rapid and targeted mortgage and rent relief where it is most urgently needed. Because governments are already overextended, banks and real estate owners should manage the programs I’m proposing, with government limited to providing funds, liquidity and loan guarantees. Minimizing the government’s role and putting the onus of implementation on banks and landlords would encourage efficiency and speed.

A new homeowner program would have borrowers apply online directly to their bank for mortgage relief. Borrowers’ location, income and mortgage obligations would determine how much monthly mortgage relief they get. Banks would then be reimbursed by government and would hold off on foreclosures. They would later issue a tax slip to borrowers specifying how much mortgage relief they had received. This would count as income on the homeowner’s 2020 tax return next spring.

The virtue of this system is that it adjusts the amount of relief to each household’s current situation. Moreover, the government gets part of the loan back at tax time. A low-income household with high housing obligations would benefit from a temporary mortgage subsidy. A household that also got money but returned to earning income soon after the crisis passed would owe taxes on the relief and so in effect would have benefited from an interest-free loan. Money flowing back to the government next spring would reduce the total cost of the program.

As for tenants, they would contact their landlord to get rent relief. The government would reimburse landlords, thus enabling them to service their own mortgages without having to evict any tenants. Tenants would also declare their rent relief as taxable income.

Finally, governmentbacked, interest-free bank facilities for commercial real estate could facilitate rent-relief negotiations between landlords and their commercial tenants. Such facilities would fund only rent deferrals to clients, not rent forgiveness. The loans would have to be reimbursed after the crisis. Limiting government guarantees to (say) 80 per cent of the rent deferral would provide all parties with incentives to restructure vulnerable leases.

These three programs would provide the liquidity the financial sector needs in a time of great uncertainty. They avoid the mistake the U.S. government made during the past financial crisis: largely disregarding homeowners’ difficulties and focusing instead on rescuing banks, a strategic error that resulted in high rates of foreclosure and unemployment, prolonged the housing crisis and hobbled recovery.

Both the new federal wage subsidy plan and the real estate rent relief programs I propose would limit disruption, help jump-start the economy and avoid a financial crisis that would jeopardize recovery.

Trying to recreate the economic environment that prevailed in early 2020 carries the risk of slowing needed restructuring. But a successful reset will require already leveraged consumers and businesses to have both sufficient spending power and hope for the future and these policies would give them both.

THESE THREE PROGRAMS WOULD PROVIDE THE LIQUIDITY THE FINANCIAL SECTOR NEEDS IN A TIME OF GREAT UNCERTAINTY.