It was August 2020, six months into a global pandemic, when I laid out what I thought at the time was a compelling case against a wave of foreclosures similar to the one that the nation experienced during the Great Recession.
A year later, and with the benefit of 20/20 hindsight, I’m more convinced than ever that when government borrower protections finally do expire, we’ll see a relatively soft landing when it comes to foreclosures. Let’s review some of the factors we looked at a year ago and see how they played out.
Massive unemployment didn’t lead to massive defaults
Over 22 million jobs were lost due to the COVID-19 pandemic. Unemployment rates rose virtually overnight from 3.5% — the lowest level in 50 years — to almost 15%. Normally, job losses like this would have led immediately to loan delinquency, defaults, and foreclosures, but that didn’t happen this time. Why not?
The most obvious answer is that the government enacted a moratorium on foreclosure activity for the 65% of mortgages backed by a government entity — Fannie Mae, Freddie Mac, the FHA, VA and USDA. While the moratorium didn’t technically apply to loans held in private portfolios, most noteholders of those mortgages followed suit and held off on foreclosure activity.
But that’s only part of the story.
There are two other factors that weighed against a huge surge in defaults. First, the somewhat targeted nature of the recession itself — a huge percentage of job losses during the COVID recession were concentrated in a handful of service industries like travel, tourism, hospitality, retail, restaurants and entertainment, where workers were much more likely to be renters than homeowners. In fact, for much of the pandemic, rental delinquency rates have been running higher than mortgage delinquency rates, and the housing market recovered quite nicely after an initial dip in sales during the second quarter of 2020.
The second factor has been the recovery of the economy, driven in part by the boom in both existing and new home sales, which collectively have increased housing’s contribution to the economy to a 14-year high, approaching 18% of GDP.
This economic recovery has resulted in regaining almost 65% of the jobs that were lost during the recession. Many economists are forecasting that employment numbers will surpass pre-pandemic numbers sometime in 2022. Contrast that with the recovery from the Great Recession, where it took over a decade to recover the jobs lost.
Forbearance doesn’t necessarily mean foreclosure after all
A popular theory in the early days of the pandemic insisted that many millions of borrowers would seek the mortgage forbearance offered by the government’s CARES Act and that for many of them, forbearance was no more than a precursor to foreclosure. Fortunately, the math hasn’t supported that theory so far.
The number of borrowers in the program peaked at the end of March, with 8.55% of all borrowers — almost 4.3 million — in forbearance. The number has gone down consistently since then, with more borrowers exiting the program than entering it. While more than 7 million borrowers in all have entered the program at some point since it was initiated, at the end of June 2021, there were just about 2 million people still in the program, about 3.9% of mortgage borrowers. Almost half of those remaining (900,000) are scheduled to cycle out of the program by the end of this year.
A look inside the numbers tells an even more optimistic story. According to the Mortgage Bankers Association, 85% of the borrowers who have exited the program over the past year have done so successfully. These borrowers have either never missed a payment and continued to make payments as they’ve exited; arranged for a partial deferral; entered into a repayment program; or paid off their loan in full. Only 15% of those who have exited the program have done so without one of those positive outcomes in place (and some of them have subsequently entered into a payment plan, or re-entered the forbearance program).
More good news for those borrowers who will exit forbearance in 2021: the CFPB issued new servicing rules providing even more of a safety net until January 2022. For the balance of 2021, servicers will only be able to initiate foreclosures on loans held on vacant and/or abandoned properties; loans where the borrower has been offered but not qualified for loan modifications; loans where the borrower has been unresponsive to servicer outreach; and loans which were 120 days delinquent prior to March 1, 2020.
Generous repayment options will also help prevent foreclosures. The CFPB rules disallow loan modifications that raise monthly payments and also forbid adding fees or fines to the amount owed by the borrower. Terms can be extended up to 480 months. And borrowers with government-backed loans will be presented with the option of paying all deferred amounts at the end of the loan — whether it reaches full term, is refinanced or the home is sold.
Supply/demand imbalance & rising equity equal safer landing
Not all homeowners will be able to avoid foreclosure, despite all the efforts of the government to protect borrowers. But for those who need to sell, market dynamics work very much in their favor.
Demand for housing, driven by demographics (millennials reaching prime home-buying age), historically low mortgage interest rates and the pandemic itself, continue to outpace available supply. According to the National Association of Realtors, homebuilders have undersupplied the market by between 5.5 and 6.8 million units over the past 20 years. This supply and demand imbalance has driven prices higher, contributing to a record $2.3 trillion in homeowner equity.
According to RealtyTrac parent company ATTOM Data Solutions, more than 70% of homeowners have more than 20% equity. So for the majority of homeowners, there should be an opportunity to sell their home if they need to, rather than risk losing everything to a foreclosure — a far cry from where the market was during the Great Recession when over 30% of homeowners were underwater on their mortgages.
Mortgages were performing exceptionally well before COVID-19
Another reason I was optimistic about the market a year ago is how well mortgages had been performing over the past decade. Loan quality was extraordinary — delinquency rates were running lower than historic averages despite a spate of natural disasters that inflated those numbers, and foreclosure activity was running at 0.6%, well below the normal level of 1%.
While the number of seriously delinquent loans rose during the pandemic — driven largely by the millions of borrowers in the forbearance program — they have declined steadily since peaking during the second quarter of 2020, according to the MBA, and early stage delinquencies (30 and 60 days past due) are at their lowest levels since the organization started collecting this data in 1979. Barring another economic shock — one without massive government financial stimulus — these are simply not the kind of loans that are likely to go into foreclosure anytime soon.
The song remains the same
Looking back a year later, it seems that the conclusions drawn then are still the most likely outcome we’ll see ahead: There will definitely be an increase in default activity. But given the factors discussed above, it doesn’t seem likely that we’ll see nearly as much default activity this time as we did in 2008.
This was pulled from the August Issue of HousingWire Magazine To view HousingWire’s magazine, go here.
To contact the editor of this commentary, email HW+ Managing Editor Brena Nath at [email protected].
