WASHINGTON (Reuters) – The United States could face financial stress even as the pandemic eases if homeowners and businesses fall behind on mortgages and business leases while the economy recovers, Kansas City Federal Reserve President Esther George said on Tuesday.
George’s remarks to a real estate group injected a note of caution to the generally optimistic view that her colleagues and private forecasters have of the coming year, when the rollout of vaccinations is expected to ease the nation’s health crisis and allow a fuller economic reopening.
The risk, she said, is that mortgages that have been put into forbearance during the pandemic will fall officially into arrears, while businesses that may have paid their rent using the proceeds of government loans will now have to fend for themselves.
On top of that, the reshuffling of the population and jobs away from city centers may change rents and prices, a potential shock to both borrowers and lenders in the real estate market.
“While the strains on real estate finance currently appear contained, this relative health has been importantly supported by the extraordinary policy response to the pandemic,” George said in remarks to the forum, organized by the University of Missouri-Kansas City. “If support fades ahead of a sustained recovery, stresses could become more prominent, especially against a backdrop of disruptive structural change.”
“A worrying scenario is that the economic impact of the pandemic outlasts the policy support programs currently in place. Should that occur, many renters and businesses could find themselves unable to meet their obligations, forcing banks to realize losses on existing loans and weighing on credit growth and broader economic activity.”
Single-family housing in general has been a bright spot during the pandemic, with mortgage rates held at record lows by the Fed sparking a “booming” market, George said.
In general, Fed officials have felt that the financial system has remained healthy and stable throughout the crisis. But they’ve also acknowledged that the pandemic may change the economy in fundamental ways, be it a preference for housing farther from population centers or a permanent shift towards working from home.
“Any significant change in the location of economic activity, regardless of its specific form, has the potential to significantly affect the valuations of residential and commercial real estate. These revaluations, in turn, have important financial stability implications,” George said.
Reporting by Howard Schneider; Editing by Andrea Ricci