February 3, 2021
By Erich Roden
Will the Foreclosure moratorium prevent a foreclosure wave in 2021?
What is the major difference between the 2008 Economic meltdown and today’s challenges?
Overall, there are two different perspectives on whether there will be a wave of foreclosures in 2021 or once the foreclosure forbearance ends. Let’s start with the perspective that it is unlikely that we will see a foreclosure wave in 2021. Expert Economists in the industry direct their reasons to an improving employment picture, higher home prices and post-forbearance payment deferrals. These subjects are what will prevent from a large number of Foreclosures to hit the Real Estate Market and impact values and inventory.
With the anticipation that we will have an improved U.S. economy, Experts expect that this should increase the number of forborne homeowners who will be able to exit by reinstating their loan to current status, entering into a repayment plan or resuming payments and adding the missed ones to the end of their loan term. Furthermore, the COVID-19 vaccine and another potential round of fiscal stimulus from the federal government will boost the labor market, making it easier for borrowers to resume payments. 45% of Freddie Mac’s forbearance exits were through deferral, and 10% of Fannie Mae’s total loans in forbearance went into deferral, second only to reinstatement at 22%. With this being said, it is widely accepted that after mortgage forbearance ends, there will be several low-income homeowners that will have no other choice but to foreclose on their homes, however, most of these foreclosures will take place outside of California and do not expect to impact the inventory and values of home in the immediate market.
ATTOM Data Solutions, points to where those foreclosure waves may be coming. According to the numbers released this week, Louisiana, New York, New Jersey, Mississippi, and Florida have the highest statewide shares of delinquent loans right now.
At the metro level, these are the markets you should keep your eye on as forbearance periods end:
- Miami (12% of all loans)
- New York (11%)
- Las Vegas (10%)
- Houston (10%)
- Chicago (8%)
As mentioned, there are two perspectives on if we should expect a wave of foreclosures in 2021 or when the mortgage forbearance ends. We just discussed the perspective that it is unlikely and now let’s move onto the perspective of wave of foreclosures likely coming and is expected to mainly hit low-income homeowners. Here are some reason why the Experts believe we should expect a wave of Foreclosures…
As of August, over 10% of the eight million single-family mortgages backed by the Federal Housing Administration were delinquent by more than three months. According to the FHA, the reason for 86% of those delinquencies was ‘a national emergency,’ a category that includes the pandemic. These delinquencies are heavily concentrated among loans associated with low credit scores.
According to CoreLogic, the 150-day delinquency rate just hit its highest level in two decades. And the share of all loans currently in some stage of delinquency is now at 6.6%, which is up 2.9 percentage points from the year-ago period.
Here’s how the totals broke down by delinquency stage:
- 30 to 59 days delinquent: 1.6% of all mortgage loans
- 60 to 89 days delinquent: 0.8%
- 90+ days delinquent: 4.3%
- 150+ days delinquent: 1.2%
More than 3.3. million of U.S. homeowners will be on the hook for delinquent payments when mortgage forbearance ends. While some of those homeowners who are overleveraged or unaware of their options will contribute to a wave of foreclosures, most will be able to work with their lenders to either refinance their mortgage or sell to cash in on rising home values.
Now, what is the major difference between the 2008 Economic meltdown and today’s challenges?
At the peak of the foreclosure crisis in 2010, the national average loan-to-value ratio was 94%, meaning the average homeowner owed their lender nearly as much (94%) as the value of their home. As a result, many financially stressed homeowners couldn’t even afford to sell their home after paying commissions and closing costs, so they often ended up in foreclosure. Currently the average loan-to-value ratio, among metros that report data, is 70%, meaning that the average homeowner has built 10% additional equity beyond an initial 20% down payment.
Also, American homeowners have gained $2 trillion dollars in home equity since the beginning of the pandemic alone, thanks to double-digit price growth driven by soaring homebuyer demand as the supply of homes for sale fell to historic lows. This puts us in a very different situation economically and for the Real Estate Market alone compared to the crash in 2008.
In summary, the overall consensus appears to be obvious…The Foreclosure wave, if it is much of anything, will be very minimal and will not impact inventory nor values in the Real Estate Market. Here are some more reasons why it is obvious to come to this conclusion…
Fannie Mae and Freddie Mac will allow borrowers in forbearance to defer repayment until the time the home is sold or refinanced. With record-low mortgage rates, homeowners behind on payments could theoretically refinance their mortgage debt into monthly payments lower than before the pandemic began. And if a borrower is in severe debt she may still be able to do a short sale or take advantage of cash-for-keys, where borrowers get a one-time payment to vacate their home.
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