The question on everyone’s minds these days in the real estate industry is what the foreclosure situation will look like after the various moratoria and forbearance initiatives expire. Will tenants taking advantage of these programs ultimately end up defaulting on their loans?
The short and simple answer is that another wave of widespread foreclosures is most likely not looming on the horizon; however, mortgage servicers and other stakeholders should still implement sufficient preparatory measures.
There are some market analysts who expected a significant uptick in foreclosures after the forbearance programs come to an end. Luckily, the program has proven effective so far. For example, the Federal Reserve Bank of St. Louis estimated that approximately 500,000 borrowers prevented foreclosure throughout Q4 of 2020 due to collective relief efforts—making the CARES Act one of the most effective instances of the government and corporate sectors collaborating to accomplish a mutually desired outcome.
The government stimulus has accomplished what it was designed to do: enabled countless American citizens to weather the pandemic uncertainty and resultant economic instability without forfeiting their homes. But millions of borrowers remain in the forbearance program. What will happen to them as this resource becomes unavailable, and how will the overall industry deal with the increase in requests for flexible repayment plans?
At the close of 2020, around 5.5% of existing mortgages nationwide were in the forbearance program, having decreased from the peak of 8% in March. Although this means there is still a substantial number of borrowers for loan providers to handle as they leave the program, it doesn’t automatically mean that an equivalent number of foreclosures will follow. In fact, the statistics indicate the contrary: as borrowers have left forbearance, they have predominantly avoided foreclosure. Data compiled by the Mortgage Bankers Association indicated that approximately 87% of borrowers exiting forbearance did so with an established repayment plan, paid off the loan or had a loan modification in place—all favorable results. The remaining 13% of borrowers that lacked a repayment or other contingency plan are the segment with the highest probability of defaulting—meaning that in the next six months some 325,000 individuals could potentially default.
Unemployment rates specifically,are crucial factors that will determine the default rate in markets across the country for the remainder of 2021. Prior to the pandemic, unemployment rates were hovering around 3.5%, which was the lowest they had been for nearly half a century. As 2020 came to a close, unemployment rates had decreased from nearly 15% during the initial phases of COVID-19 to approximately 6.8%, nearly double that of pre-pandemic levels. If we were to assume that unemployment figures remain the same, it would be logical to predict that default rates would proportionately increase. Based on the disparate impact the virus has had on different industries, there could potentially be specific geographic markets that are more susceptible to defaults as opposed to others—such as Las Vegas, Orlando and other metropolitan areas whose economies are largely dependent on travel, tourism and entertainment.
It’s important to keep in mind that not all defaults will result in foreclosures. When a borrower defaults on a loan, its fairly common for the default to be corrected prior to the foreclosure process being carried out. Outstanding balances can be re-instated or refinanced, or the property can be independently sold and the debt recompensated prior to the foreclosure auction taking place. Additionally, research shows that around 70% of homeowners today have more than 20% equity in their homes. Borrowers with substantial equity in a housing market that is experiencing historically reduced inventory levels and mortgage rates should be able to easily sell their properties in order to circumvent the foreclosure process if necessary
The main takeaway is that while the number of foreclosures in 2021 will probably not rival those experienced during the Great Recession, services should still be planning ahead to ensure they have the resources to handle what could be a considerable rise in mortgage defaults in the coming months.