Forbearances leading to foreclosures?
At the beginning of the COVID crisis, there was a lot of confusion about forbearances and fear that they would lead to a wave of foreclosures. I must admit, given misinformation that was published in April 2020, I was also concerned homeowners might end up with a huge balloon payment, pushing them into pre-foreclosure.
Of course, hindsight is always 20/20! Now we have good news overall and have found many homeowners entered forbearance as a precaution and never fell behind on their payments. Others have been able to successfully do a mortgage modification or switch to a deferment, allowing the missed payments to be added on the back-end of their mortgage. I’m grateful the banking industry has been responsive, unlike what happened in the mortgage crisis.
What about distressed home owners?
Early in the COVID crisis, we could not predict the increase in values we’ve seen given market shifts as a result of the COVID pandemic. For home owners who are at risk of foreclosure, many now find they have enough equity to sell without doing a short sale, resolve their deficiency and even make some profit.
If you have a forbearance ending soon and may be at risk of not being able to pay back payments, now is the time to take action. You have options, as long as we work ahead of the deadlines. Getting a forbearance was a smart move! Now it’s time to find the best option for you to resolve this and move forward.
While this market update has good news to share overall, it’s important for home owners who may not be able to resolve their forbearance to know this is a prime time to use a short sale as a solution. If your home is already in forbearance, it will expedite the process with your lien holder.
4 reasons why the end of forbearance will not lead to a wave of foreclosures
Here are four reasons why a wave of foreclosures like happened during the mortgage crisis won’t happen now.
1. There are fewer homeowners in trouble this time
After the last housing crash, about 9.3 million households lost their home to a foreclosure, short sale, or because they simply gave it back to the bank.
As stay-at-home orders were issued early last year, the overwhelming fear was the pandemic would decimate the housing industry in a similar way. Many experts projected 30% of all mortgage holders would enter the forbearance program. Only 8.5% actually did, and that number is now down to 3.5%.
As of last Friday, the total number of mortgages still in forbearance stood at 1,863,000. That’s definitely a large number, but nowhere near 9.3 million.
2. Most of the 1.86M in forbearance have enough equity to sell their home
Of the 1.86 million homeowners currently in forbearance, 87% have at least 10% equity in their homes. The 10% equity number is important because it enables homeowners to sell their houses and pay the related expenses instead of facing the hit on their credit that a foreclosure or short sale would create.
The remaining 13% might not all have the option to sell, so if the entire 13% of the 1.86M homes went into foreclosure, that would total 241,800 mortgages. To give that number context, here are the annual foreclosure numbers of the three years leading up to the pandemic:
- 2017: 314,220
- 2018: 279,040
- 2019: 277,520
The probable number of foreclosures coming out of the forbearance program is nowhere near the number of foreclosures coming out of the housing crash 15 years ago. The number does, however, draw a similar comparison to the three years prior to the pandemic.
3. The current market can absorb any listings coming to the market
When foreclosures hit the market in 2008, there was an excess supply of homes for sale. The situation is exactly the opposite today. In 2008, there was a 9-month supply of listings for sale. Today, that number stands at less than 3 months of inventory on the market.
As Lawrence Yun, Chief Economist at the National Association of Realtors (NAR), explains when addressing potential foreclosures emerging from the forbearance program:
“Any foreclosure increases will likely be quickly absorbed by the market. It will not lead to any price declines.”
4. Those in power will do whatever is necessary to prevent a wave of foreclosures
Just last Friday, the White House released a fact sheet explaining how homeowners with government-backed mortgages will be given further options to enable them to keep their homes when exiting forbearance. Here are two examples mentioned in the release:
- “For homeowners who can resume their pre-pandemic monthly mortgage payment and where agencies have the authority, agencies will continue requiring mortgage servicers to offer options that allow borrowers to move missed payments to the end of the mortgage at no additional cost to the borrower.”
- “The new steps the Department of Housing and Urban Development (HUD), Department of Agriculture (USDA), and Department of Veterans Affairs (VA) are announcing will aim to provide homeowners with a roughly 25% reduction in borrowers’ monthly principal and interest (P&I) payments to ensure they can afford to remain in their homes and build equity long-term. This brings options for homeowners with mortgages backed by HUD, USDA, and VA closer in alignment with options for homeowners with mortgages backed by Fannie Mae and Freddie Mac.”
When evaluating the four reasons above, it’s clear there won’t be a flood of foreclosures coming to the market as the forbearance program winds down.
As Ivy Zelman, founder of the major housing market analytical firm Zelman & Associates, notes:
“The likelihood of us having a foreclosure crisis again is about zero percent.”
What does that mean for buyers?
If you’re waiting for a wave of foreclosures to get a good value, it’s now clear that’s not likely to happen. Let’s connect today and discuss what your buying goals are, where off-market opportunities may be and how we can strategize for your success.
Should I sell now?
Whether you’re facing the end of your forbearance, or simply wondering if it’s a good time to sell – let’s connect. Today’s dynamic market provides a unique opportunity for sellers. One that we may not see again in the future.
With inventory and interest rates inching up, we’ve already started to see a shift in the market towards buyers. If you’ve ever thought about selling, now is the time. High values, strong demand and low interest rates make this a unique opportunity to sell.