Foreclosure fever is coming back. With more than 55 million people filing unemployment claims in the past few months the natural expectation is that soaring foreclosure rates lie ahead. It will be like the mortgage meltdown a dozen years ago all over again, right?
Well, maybe not. As they say on Wall Street, past performance is no guarantee of future results.
“Right now all is quiet on the foreclosure front but caution is in order,” said Rick Sharga, Executive Vice President with RealtyTrac, a leading source of investor leads and data. “While it’s unlikely that we’ll see the kind of foreclosure tsunami we saw between 2006 and 2010 when we had more than 18 million foreclosure filings, it’s very likely that we’ll see an increase in delinquencies and defaults once the foreclosure moratoria and loan forbearance programs expire.”
The new economics of homeownership cut both ways for investors. Fewer foreclosures reduce the opportunity to buy at discount, but lower foreclosure numbers also mean stronger home prices and better rents. Here’s what’s happening.
Foreclosure activity & the COVID-19 pandemic
Foreclosure filings such as default notices, scheduled auctions and bank repossessions in 2019 were at their lowest level since tracking began in 2005, according to ATTOM Data Solutions U.S. Foreclosure Market Report. Looking forward, ATTOM expects foreclosure activity to at least double by 2021.
“In the most likely scenario,” says ATTOM, “the number of cases somewhere in the foreclosure process would shoot up more than 100 percent, from the current level of about 145,000 to roughly 336,000 in the second quarter of 2021.”
The catch is that while foreclosure filings will rise with so much unemployment a lot of potential foreclosures will never happen. Homeowners who have lost jobs, businesses, and income may be able to avoid foreclosure through forbearance or by selling.
Homeowners have already dodged large numbers of potential foreclosure actions. For instance, about 3.6 million loans were in forbearance as of mid-August, according to the Mortgage Bankers Association (MBA). Forbearance is usually seen as a hint of foreclosures to come, but in the COVID-19 economy it turns out that forbearance is not quite what it seems.
Forbearance is an arrangement that modifies the mortgage agreement between a borrower and a lender. A borrower might make interest-only payments for several months or skip payments entirely during forbearance. Late fees and credit dings can often be avoided. Once the forbearance period ends, the borrower must then repay the debt, perhaps by making larger monthly payments (a payment plan) or making regular payments and adding additional months to the end of the loan term.
Lenders and loan servicers typically decide whether to offer forbearance on a case by case basis, but with the passage of the CARES Act (the Coronavirus Aid, Relief, and Economic Security Act) in March the rules changed. If a property was financed in a way that involved the FHA, VA, USDA, Freddie Mac, or Fannie Mae then evictions and foreclosures were banned. A borrower impacted by COVID-19 can get forbearance for 180 days (about six months) plus – if requested – a 180-day extension. Many states, counties, and cities followed in quick succession with more-or-less similar bans.
Forbearance was now available on request because of the pandemic and millions of loans – though not all – were covered by the new rules. Millions of households faced job losses and income declines at the same time. The result was those 3.6 million forbearance requests mentioned earlier.
Here’s the catch. A lot of people apparently sought forbearance as a preventative strategy, an insurance policy of sorts, and a way to hoard cash in case things got really bad. A LendingTree report published in May found that most forbearance recipients actually had the ability to make their payments.
“While the majority of people who applied were approved,” said LendingTree, “only 5% said they wouldn’t have been able to pay their mortgage without forbearance.”
Now, an August study by the Urban Institute found that “more than 1 million households in forbearance are still paying their mortgages.”
A large percentage of the homes now in forbearance are unlikely to face foreclosure. They have forbearance status, not because the borrowers can’t make their payments but because forbearance offers a way to cut monthly costs and preserve cash in very uncertain times.
The selling option
But – alternatively – let’s say that a homeowner can no longer make monthly payments, even regular payments once a forbearance plan ends. This could be very bad in a down market with falling local prices.
Here’s the catch: In early September the housing market looks surprisingly strong. It seems difficult to imagine that with so many people now unemployed the residential real estate could be doing well but that’s the situation.
- Freddie Mac reported that weekly mortgage rates stood at 2.91% for fixed-rate, 30-year financing at the end of August. That’s just .03% above the historic record, 2.88% in early August.
- Existing home prices in 174 of 181 metropolitan statistical areas (96%) were up in the second quarter according to the National Association of Realtors (NAR).
- NAR also reported that the median existing-home price reached $304,100 in July, up 8.5% from a year earlier. “July’s national price increase marks 101 straight months of year-over-year gains,” said the Association. “For the first time ever, national median home prices breached the $300,000 level.”
What these numbers mean is that distressed homeowners likely have a way to beat foreclosure. They can readily sell their homes in most markets and with rising property values they may be able to walk away from the property with a check from closing. It’s not a great option if you want to keep the home but it’s far better than foreclosure and a demolished credit standing.
The good news
One lesson from the mortgage meltdown was that mass foreclosures ruined nearby property prices. A foreclosure included in an appraisal could reduce nearby home values even if the neighbors were making payments or had no mortgage debt at all.
“The CARES payments, foreclosures bans, and enlarged unemployment benefits have kept a large number of homes off the foreclosure lists,” said Sharga. “That’s helped millions of homes maintain their value. It’s very good news because markets with rising prices are a plus for investors, a financial tide that lifts a lot of boats.”