By: Leor Margulies -
There is not one part of society that has not been materially impacted by the drastic measures taken to beat this awful COVID-19 virus. Businesses are shut, planes aren't flying, hotels are empty, restaurants no longer are in business, office buildings are empty, and the list goes on and on. The government is doling out monies to businesses and employees to the extent that they can to help tide them over these unprecedented catastrophic times. We have all heard of the plight of both individual and business tenants who have no income or operations to generate rent or enough income their rent. The government has attempted to address these issues by providing funding to individuals through the CERB or expanded VI benefits, or employee top-ups to businesses, $10,000 per employee or 75% salary not to exceed $58,000 in the event a business loses 15% (reduced from 30% yesterday) of more of its revenue year over year during the applicable COVID-19 months.
These amounts will certainly help both individuals and businesses. However, it may not be enough for tenants and of course, the domino effect is such that if tenants don't pay their rents, landlords can't pay their operating expenses or their mortgages. Earlier this week, B.C. announced plans to launch the TEMPORARY RENTAL SUPPLEMENT ("TRS") of up to $500 per month for eligible tenants to be paid directly to landlords. This is a small but appropriate step for low and moderate income renters to be able to meet their rental obligations and as well, to help landlords with their cash flow in meeting their obligations. Details of the program are still to be released but this is a step in the right direction.
However, homeowners who don't get enough income will also default on their mortgages. What has the government done in this regard? Basically, nothing. Their answer is to put money into the hands of businesses and money into the hands of individuals so that they will hopefully have enough money to pay their rent or mortgages. But we all know that it won't be enough and it won't come fast enough.
The government has very strongly encouraged lenders, particularly banking institutions, to grant mortgage payment deferrals for individuals for up to 6 months. These are being done by banks on an individual and discretionary basis. A very arduous and painstaking process. Hardship has to be established and then the question is "How long will the deferral be given?" At the end of the day, it will only be a deferral and will be added to the principal amount once mortgage payments start flowing. https://tinyurl.com/vekvayj
For property owners and homeowners, a more defined deferral process needs to be implemented and right away. In the U.S. under the CARES Act, federally insured mortgages, which make up close to 70% of all residential mortgages in the U.S., are eligible for deferrals for up to 6 months on simple applications. https://tinyurl.com/u36zn86 Perhaps this is a little bit too open-ended, but at least those deferrals can be implemented immediately and without substantial review and discretion on the part of each bank. In fact, the extension could go for up to another 180 days in appropriate circumstances. In the U.S. this is helping out up to 65-70% of residential homeowners but no relief is offered under this program for commercial borrowers.
No such program has been implemented in Canada. The most obvious solution would be to have CMHC, which is the equivalent to the U.S. federal insurers like Fannie Mae and Freddie Mac for both residential mortgages and commercial mortgages which CMHC insures. Although CMHC does not insure the same percentage of mortgages as do the American insurers, it would help a lot of people that are on limited budgets who have had to use CMHC insurance to help acquire or mortgage their properties. In commercial situations, CMHC insurance is used quite extensively on apartment buildings and a program like this tied to rent deferrals would help apartment building owners help struggling tenants.
I am at a loss to understand why a similar program has not been considered and implemented in Canada. It would be simple and easy and provide some very quick relief. It would avoid major and multiple tenant defaults and mortgage defaults. I am hoping that this crisis only lasts 2 or 3 months, and if so, these mortgage deferrals, when added to 25 year amortized mortgages, would not be impossible to carry once things get back to normal.
The government needs to act quickly in this area if it wants to avoid a situation like the U.S. had in 2006-2010 over leveraged properties. It is time to act, now.