At the start of the pandemic, the federal government staved off a potential foreclosure crisis by allowing many homeowners who could no longer make their mortgage payments to enter a forbearance period.
Now the concern is what will happen when this temporary clemency period winds down while many are still struggling financially.
Does this mean the nation is headed for another foreclosure crisis that will force millions from their homes and leave behind a slew of vacant properties in its wake? Not likely, housing experts say.
Ironically enough, the high home prices and competitive housing market that have tormented buyers may be exactly what will prevent a repeat of what happened during the Great Recession.
With home prices reaching new highs, few homeowners today owe more on their homes than their properties are worth. Plus, the nation is in the throes of a historic housing shortage, so any homes that go on the market are likely to be snapped up quickly. So if homeowners can’t make their mortgage payments, they can take another path, one far less painful than foreclosure: sell, often at a hefty profit.
“Right now, we’re at very low housing inventory rates, just a record low,” says Marina Walsh, vice president of industry analysis at the Mortgage Bankers Association. That means homes are selling quick, often for well over the asking price as buyers compete over them. “There’s just not enough housing out there for the demand, which is a big, big change from the Great Recession.”
The metros with the highest percentage of homes that are “seriously underwater,” which ATTOM defines as owing at least 25% more than what the home is worth, include Baton Rouge, LA; Syracuse, NY; Youngstown, OH; Toledo, OH; Scranton, PA; Cleveland, OH; Akron; OH; New Orleans; Dayton, OH; and Virginia Beach, VA.
These places are part of a larger trend in the Midwest and South, where metro areas tend to have lower home prices than the rest of the country. That’s great news for people looking for more affordable living situations, but ATTOM has also found that lower house prices tend to correlate with more homes underwater.
In contrast, metros in the West, have less than 2% of homes underwater. That’s because these places have strong economies marked by thriving job markets and high salaries as well as plenty of things to do. People want to live there, which drives up the cost of a limited supply of housing.
The areas with the most homeowners at risk tend to be places with lower home values, where sellers couldn’t fetch as much for their properties. Many of these places are in the Rust Belt, where weaker economies and fewer good-paying jobs have lessened the demand for homes and the ability of buyers to offer higher prices, and hurricane-prone communities in Louisiana, according to ATTOM Data Solutions, a real estate information firm.
Forbearance rates are steadily dropping, but many homeowners are seriously behind on payments
To stave off another rush of foreclosures, the federal Coronavirus Aid, Relief, and Economic Security Act prohibited foreclosures of federally backed home mortgages in most circumstances. Government-backed loans make up about half of all residential mortgages. That moratorium has since been extended to June 30.
The law also allowed homeowners with federally backed loans to be in forbearance for an unprecedented length of time if approved by their lenders. Prior to this crisis, homeowners might be able to get forbearance for a few months, usually after some sort of natural disaster. Now, there are some homeowners who may get forbearance for an entire 18 months, from March 2020 to September 2021.
“We can’t have indefinite forbearance, and we can’t have an indefinite foreclosure moratorium,” says Walsh of the Mortgage Bankers Association. “As things get back to some sense of normal, people have to move on.”
Many homeowners are seriously delinquent on their mortgages, but not underwater.
Another looming problem: 5% of homeowners are in foreclosure or seriously delinquent, meaning that they haven’t made a mortgage payment in three months or more, according to a February report from the Urban Institute. That number includes people in forbearance.
“They have the option to sell the properties and move to a more affordable unit,” she says. “Or in the worst-case scenario, they’ll have to switch to rental housing.”
Only 3% of homeowners owe more than the home is worth, by the Urban Institute’s estimate, which is called being “underwater.” In comparison, about 30% of homes were underwater or close to underwater during the Great Recession.
The housing boom hasn’t benefited all parts of the country equally. Many metropolitan areas in the Rust Belt and Louisiana still have a high percentage of homeowners who owe more on their mortgages than their homes are worth, according to an analysis from ATTOM Data Solutions.
Homeowners have many options to avoid foreclosure.
Even folks who are underwater on their loans will have a variety of options available to make up for missed payments.
For example, instead of having to pay back all of the money they owed during forbearance all at once, homeowners may be able to defer those payments until the end of the loan period. That means they could potentially tack on what they owe to the end of their 30-year loans if their lender approves that option. Or they might be eligible to have their monthly payment reduced as well as other measures.
On April 5, the CFPB proposed new rules that would permit mortgage companies to offer homeowners a faster, less paperwork-heavy process for making mortgage payments more affordable. In addition, there would be a special pre-foreclosure review period, so that the process of foreclosure on most homes could not even start until 2022.