No Wave of Foreclosures Coming To Your Neighborhood

Many homeowners were allowed to stop making mortgage payments when mortgage forbearance programs were first announced. Analysts were concerned that the housing market might experience another wave of foreclosures after the end of the forbearance program. This was similar to what happened 15 years ago following the housing bubble.

Let's take a look at the reasons why this is not true.

1. This time, there are fewer homeowners in trouble

Over nine million homeowners lost their homes in the housing crash. Many people believed that millions more homeowners would suffer the same fate this time.

Today's data indicates that most homeowners have either been fully paid off or received a plan from their bank to restructure their loan so that they can start making regular payments. The Mortgage Bankers Association (MBA), which tracks how homeowners exited the program between June 2020 and November 2021, has released the most recent data.

These are the results:

38.6% of the participants left the program paid-in-full

• 19.9% made their monthly payments during the forbearance period
• 11.8% made up all past-due payments
• 6.9% paid off the entire loan in full

44% negotiated work-out repayment plans

• 29.1% received a loan deferral
• 14.1% received a loan modification
• 0.8% arranged a different repayment plan

0.6% sold as a short sale or did a deed-in-lieu

16.8% left the program still in trouble and without a loss mitigation plan in place

2. The Program Repayment Plan Can Still Be Negotiated by Those Who Are Left

The total number of mortgages in forbearance as of Friday was 890,000. The servicing company representing their lender can still help those who are in forbearance. Federal and state agencies are compelling servicing companies to make that happen.

Rick Sharga, Executive Vice President at RealtyTrac, says in a recent tweet:

“The [Consumer Financial Protection Bureau] and state [Attorneys General] look like they're adopting a ‘zero tolerance’ approach to mortgage servicing enforcement. Likely that this will limit #foreclosure activity for a good part of 2022, while servicers explore all possible loss [mitigation] options.”

For more information, read the warning issued by the Attorney General of New York State.

3. Most Homeowners Have More Than Enough Equity To Sell Their Homes

Many people who are unable to negotiate a solution, and 16.8% of those who quit the forbearance program without working out, will have enough equity in their homes to be able sell them and leave the closing with cash rather than facing foreclosure.

The average homeowner has seen record-breaking equity gains in their home due to the rapid rise of home prices in the past two years. Frank Martell, President and CEO of CoreLogic, shares his thoughts:

“Not only have equity gains helped homeowners more seamlessly transition out of forbearance and avoid a distressed sale, but they’ve also enabled many to continue building their wealth.”

4. In the last two years, there have been far fewer foreclosures

One of the benefits of the forbearance program was the ability to allow households with financial difficulties before the pandemic to join the program. These homeowners were able to take two additional years to organize their finances and come up with a plan together with their lender. This prevented more than 400,000 foreclosures from happening if the program had not been created. Without the new forbearance program, the real estate market would have needed to absorb these foreclosures. This graph shows the data:

5. The Market can easily absorb more than a million new listings

In 2008, foreclosures increased the supply of homes that were for sale. This resulted in a supply of over nine months, and any supply exceeding six months can lead to prices falling.

Today, it's the exact opposite. The National Association of Realtors (NAR), released the latest Existing Home Sales Report.

“Total housing inventory at the end of November amounted to 1.11 million units, down 9.8% from October and down 13.3% from one year ago (1.28 million). Unsold inventory sits at a 2.1-month supply at the current sales pace, a decline from both the prior month and from one year ago.”

A balanced market would have inventory that lasts approximately six months. The market is severely understocked at 2.1 months. Even if one-million homes are added to the market, there won't be enough inventory available to meet current demand.

My Final Thought

The housing market will not be affected by the end of the forbearance program. Sharga says it best:

“The fact that foreclosure starts declined despite hundreds of thousands of borrowers exiting the CARES Act mortgage forbearance program over the last few months is very encouraging. It suggests that the ‘forbearance equals foreclosure’ narrative was incorrect. . . .”