The Big Real Estate News No One Is Covering

The announcement that fully vaccinated individuals need no longer wear a mask in most cases is a significant turning point in the fight against COVID-19. With the pandemic beginning to fade it also means that the economy can increasingly get back to normal. Something else has also happened, but this reality has generated few headlines […]

authorWritten by Manuel Martinez, RealtyTrac contributorPublished Jun 2, 2021

Last updated

Key Takeaways

  • Bank failures fell from 157 in 2010 to 4 in 2020, per FDIC data.
  • Stricter reserve rules and limits on toxic mortgages helped banks weather the pandemic.
  • About $5.3 trillion went to the public in 2020 through programs such as PPP and unemployment aid.
  • About 99% of mortgages are believed to be qualified mortgages under Dodd-Frank.
  • Lenders averaged a $4,202 profit per loan in 2020, up from $1,470 in 2019.

The announcement that fully vaccinated individuals need no longer wear a mask in most cases is a significant turning point in the fight against COVID-19. With the pandemic beginning to fade it also means that the economy can increasingly get back to normal.

Something else has also happened, but this reality has generated few headlines and little recognition. In the past year the economy has taken a massive beating with millions of lay-offs, widespread business closures, and yet the financial system has done well.

Not marginally well, really well. So far, there just aren’t a lot of bank failures or foreclosures. Here’s why.

The banking system

There have been no runs on the banks and few worries about a massive financial blowout despite a pandemic that brought much of the economy to a halt. The banking system has performed exceptionally well, especially when compared with our previous economic disaster, the mortgage meltdown and its aftermath.

Bank Failures by Year
Year # of Banks Assets
2007 3 $2.6 billion
2008 25 $373.6 billion
2009 140 $170.9 billion
2010 157 $96.5 billion
2011 92 $36.0 billion
2012 51 $12.0 billion
2013 24 $6.1 billion
2014 18 $3.1 billion
2015 8 $6.7 billion
2016 5 $278.8 million
2017 8 $6.5 billion
2018 0 $0.0
2019 4 $214.1 million
2020 4 $458.0 million
Sources: FDIC, RealtyTrac

How do we explain the differing results?

We changed the rules. We told banks they needed more reserves and that they could no longer underwrite toxic mortgages. It turns out that regulation — properly done — can help us navigate financial minefields.

Government money

In 2008 the government saw the foreclosure meltdown as a top-down problem and set aside $700 billion for banks under the Troubled Asset Relief Program (TARP). Not all of the $700 billion was used, but the important point is that the government did not act with equal fervor to help flailing homeowners, millions of whom lost their homes to foreclosures and short-sales.

This time around the government forcefully moved to help ordinary citizens. Working from the bottom-up, an estimated $5.3 trillion went to the public in 2020 through such mechanisms as the Paycheck Protection Program (PPP), expanded unemployment benefits, tax incentives, and help for local governments. So far this year we have the $1.9 billion American Rescue Plan with millions of $1,400 checks as well as proposals to spend trillions more on infrastructure.

For most Americans the 2020 approach has been a hit. Unemployment claims topped 23 million last May, this May they’ve fallen to 3.7 million. Bank deposits increased by nearly $2 trillion during the past year and credit card debt fell.

Foreclosures and evictions

“A year ago much of the world faced gloomy economic forecasts but today the US is in relatively good shape,” said Rick Sharga, Executive Vice President with RealtyTrac.

“However, looming ahead we’ll need to exit from the eviction and foreclosure bans. How can we do that with as little harm as possible to tenants, landlords, real estate investors, homeowners, and lenders?”

The bans have reduced evictions and held foreclosures to bare minimums. More than $45 billion has been set aside by the government to help tenants, money that will also benefit landlords and lenders if used as intended. Under the just-passed American Rescue Plan, an additional $10 billion has been earmarked to assist homeowners facing foreclosure.

These set-asides are certainly a start, but the big question is whether more will be needed. We’ll know more in six months or a year.

Dodd-Frank

The 2010 Dodd-Frank legislation removed excess risk from the mortgage system for borrowers, lenders, and investors. It said lenders could originate just about any mortgage product they wanted, however if they originated comfy, vanilla “qualified mortgages” (QM) then they were virtually immune to lawsuits. This was a huge attraction, and today it’s believed that about 99% of all mortgages are QM.

“Qualified mortgages” were generally defined as FHA and VA loans, conforming mortgages that Fannie Mae and Freddie Mac could buy, and portfolio loans that met certain standards. Mandatory arbitration, interest-only financing, balloon payments, and loan terms in excess of 30 years were all outside the qualified mortgage definition. Prepayment penalties were severely restricted.

Another risk-reducer requires lenders to verify that all borrowers had the ability to repay their loans (ATR). According to HSH.com, “if a lender fails to comply with ATR and the borrower can prove this in court, the lender could be liable for up to 3 years of the loan’s interest costs, any charges and fees the borrower paid and the borrower’s legal fees.”

Lenders still have the right to make non-qualifying mortgages (non-QM) under the new rules, but such loans cannot include prepayment penalties and lenders can be sued more easily. Jumbo mortgages are often an example of non-QM financing.

The result of Dodd-Frank is that borrowers have safer loans, investors have less risk, rates are lower because there is less risk, and with safer mortgages there are fewer foreclosures.

But what about profits? Did the new rules hurt lenders in 2020, a year when Freddie Mac said that mortgage rates averaged just 3.11%

According to the Mortgage Bankers Association (MBA), “independent mortgage banks and mortgage subsidiaries of chartered banks made an average profit of $4,202 on each loan they originated in 2020, up from $1,470 per loan in 2019.”

“A surge in housing and mortgage demand, record-low mortgage rates, and widening credit spreads translated into soaring net production profits that reached their highest levels since the inception of MBA’s annual report in 2008,”  said Marina Walsh, MBA’s Vice President of Industry Analysis.

And what about 2021 and 2022? We just don’t know yet, but it will be interesting to watch.

Frequently Asked Questions

Why were there so few bank failures during the pandemic?

This article credits rules requiring banks to hold more reserves and barring toxic mortgages, plus government aid that went directly to the public.

What is a qualified mortgage?

Generally FHA and VA loans, conforming loans Fannie Mae and Freddie Mac can buy, and portfolio loans meeting certain standards. Interest-only loans, balloon payments and terms over 30 years are excluded.

Sources & References

Outside sources cited in this article.

  1. Failed Bank Summary, Federal Deposit Insurance Corporation
  2. About TARP, U.S. Department of the Treasury
  3. What is the ability-to-repay rule?, Consumer Financial Protection Bureau
  4. 2010 Dodd-Frank, financialservices.house.gov
  5. HSH.com, hsh.com
Manuel Martinez

About the author: Manuel Martinez

RealtyTrac contributor

Manuel Martinez is a contributor to RealtyTrac who writes about local housing markets, home buying and real estate investing. He has written for RealtyTrac since 2013, covering city and state market reports, home buying guides and tips, investment financing and strategies for buying and flipping homes.

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