Promoting legislation creating a public/private partnership whereby the Federal government would be a secondary insurer backstopping for “Black Swan Events” resulting in unemployment rates greater than 10%.
By Arthur B. Laffer and Alan M. Dershowitz Nov. 24, 2020 5:56 pm ET
Lost Your Job? You Shouldn’t Have to Lose Your Home
An insurance product could have saved billions of dollars in pandemic-related foreclosures.
The pandemic-related economic shutdown has created a crisis for many low- and moderate-income homeowners who are out of work. The loss of a job can take a terrible personal toll on a family. But unemployment is also the primary cause of foreclosure, which has a cascading negative effect on the economy. Foreclosures reduce the value of nearby homes, diminish city and state tax bases, crimp consumer spending, hurt family stability, disrupt otherwise solvent business practices, and increase health costs...
Lender paid Insurance covering the risk of homeowner unemployment
Product is intended for new mortgages or refinances to be part of a new “Safe Mortgage”
The homeowner is a secondary beneficiary of the product and will be notified of the coverage at time of origination.
With claim payment going directly to the lender / owner of the policy there is no tax consequence for the homeowner.
If the homeowner becomes unemployed and eligible for state unemployment benefit, the policy will seamlessly initiate a claim that will cover P&I for the mortgage for a time period that mirrors the state unemployment benefit (until the homeowner is re-employed or until the cap of 6 months).
The policy has a 6-month elimination period from origination to avoid moral hazard.
The coverage is portable and transfers with the mortgage note.
Average Mortgage amount$300,000
Average Mortgage duration30 years
Monthly mortgage P&I$1610
Potential claim cost$9664
Probability of claim3%
Expected claim cost$240
Target loss ratio60%
Annual premium15-17 bps
Creating a new “Safe Mortgage” that will:
Help homeowners stay in their home in times of financial stress caused by unemployment
Mitigate foreclosure and forbearance
De-risk the mortgage financial market and the GSE’s with an eye toward a potential privatization.
Add security to the secondary market
Create a seamless government response to future financial crisis without delay and the need for emergency legislation.
By Arthur B. Laffer and Alan M. Dershowitz Nov. 24, 2020 5:56 pm ET
Lost Your Job? You Shouldn’t Have to Lose Your Home
An insurance product could have saved billions of dollars in pandemic-related foreclosures.
The pandemic-related economic shutdown has created a crisis for many low- and moderate-income homeowners who are out of work. The loss of a job can take a terrible personal toll on a family. But unemployment is also the primary cause of foreclosure, which has a cascading negative effect on the economy. Foreclosures reduce the value of nearby homes, diminish city and state tax bases, crimp consumer spending, hurt family stability, disrupt otherwise solvent business practices, and increase health costs.
To ensure that mass unemployment doesn’t lead to mass foreclosures, private industry has developed a simple, effective new product in partnership with the public sector: lender-paid insurance that will seamlessly cover mortgage payments in the event of involuntary unemployment. This will help people stay in their homes while mitigating foreclosure and forbearance, reducing risk in the mortgage financial market and government-sponsored enterprises with an eye toward potential privatization, and adding security to the secondary market.
The federal government and taxpayers have a huge stake in preventing foreclosures. Of the roughly $670 billion in mortgages originated in the first quarter of this year, $471 billion was backed by the U.S. government. The federal government currently has potential default losses of up to $1.2 trillion for the Federal Housing Administration mortgage program alone, in which it owns 100% of the risk of loss for 8.1 million forward mortgage loans to low- and moderate-income Americans.
If mortgage-unemployment insurance had been in place before the pandemic hit, tens of billions of dollars in potential losses from foreclosures caused by unemployment could have been avoided. Mortgage-unemployment insurance is both preventive and automatic. It is preventive in that it plans in advance for both normal and “black swan” unemployment scenarios. It is automatic in that it kicks in as soon as an unemployed homeowner becomes eligible for state unemployment benefits.
More important, the cost of the insurance is borne by the lender or investor, who would be willing to purchase it to reduce the losses associated with defaults and foreclosures. This proposal would be a win for the homeowner, neighborhoods, mortgage companies and even the federal government, since future foreclosure losses associated with the loans that they currently back otherwise would have to be covered by tax revenue.
This isn’t a stimulus measure. The proposal—like any economically sound insurance proposal—can prevent only future losses. It can’t remedy past or current losses caused by the pandemic. But it can eliminate meaningful future risk of foreclosures and business bankruptcies in both normal and extraordinary black-swan periods of unemployment.
In a worst-case scenario, as we’ve experienced this year, the federal government would provide a backstop for losses that arise when the national unemployment rate rises above 10%, which happens rarely. That’s much less than the 100% risk the government now holds. Private companies can cover the risk effectively when national unemployment is 10% or less.
The insurance product’s technology-driven, patent-pending process meshes seamlessly with Labor Department systems in all 50 states, so when state unemployment benefits are approved, mortgage-unemployment insurance coverage would begin automatically.
Unemployment is colorblind and nonpartisan. This coverage could eliminate about 90% of future mortgage foreclosures caused by job loss. Leaders should take this opportunity to protect homeowners and their neighborhoods while reducing potential taxpayer liability from foreclosures due to unemployment. There is no better way to protect what is the greatest financial asset for most low- and moderate-income Americans.
Mr. Laffer is founder and Chairman of Laffer Associates. Mr. Dershowitz is a professor emeritus at Harvard Law School. Both men are advising MortgageSecure LLC.
