The government is doing everything it can to prop up the housing market. But when those props disappear, will we see foreclosures? Investors capitalized on the foreclosure crisis during the Great Recession. Many single-family homes were snapped up at fire-sale prices, and turned into rentals. But, investors hoping for a similar situation may be waiting for quite some time. According to some experts, we will probably see a surge in defaults and foreclosures, but not at such a grand scale and not for several months or even a couple of years. Right before the pandemic hit, in February, CoreLogic reported that mortgage delinquency rates fell for the 26th month in a row to their lowest level in more than 20 years. (1) Foreclosure inventory in February was just .4%. That’s the lowest number since January of 1999.
The pandemic changed all that. It put millions of people out of work, including many homeowners with a mortgage, who were suddenly at risk of default. The government took a proactive approach to prevent another foreclosure crisis by declaring mortgage moratoriums as part of the CARES Act. Borrowers could request forbearance on their loans, and postpone payments, without penalties.
But those moratoriums won’t last forever and borrowers who are not re-employed may not be able to hold on to their homes. According to new data from CoreLogic, that could turn into a “significantly higher” number of defaults over the next several years.
Four Million Mortgage in Forbearance
So how many borrowers are seeking help from the government? At the beginning of May, almost four million mortgages were in forbearance. Under Title IV of the CARES Act, lenders are required to grant 180 days of forbearance, and another 180-day extension if needed. That adds up to a whole year, which may be enough time for the job market to bounce back, but probably not enough time to return to the record low jobless rate we had at the beginning of the year.
CoreLogic analysts said in their report, they expect a surge in defaults. CEO Frank Martell elaborated by saying that defaults will probably come in waves for the rest of this year and next year. He said, “The pandemic and its impact on national employment is unfolding on a scale and at a speed never before experienced and without historical precedent.”
The CoreLogic analysis offers details on how this situation may play out. Researchers used a mortgage credit risk tool that combines data on loan characteristics and mortgage payment history. (2) They pumped that data into three hypothetical scenarios that they labeled baseline, adverse and severely adverse. The data also included home prices, potential unemployment figures that range from about 15% to 22%, and mortgage rates that begin with 2.54% but gradually increase from there.
A combination of all the data for the baseline scenario shows that defaults in the second quarter of 2022 will be four times what they were in April of this year. If you jump to the severely adverse scenario, researchers expect to see 10 times the number of defaults. The adverse scenario would be somewhere in the middle. It’s a big spread, but even under the baseline version, researchers believe we’ll see a substantial increase in defaults.
Real estate and business strategy expert, Rick Sharga, also expects to see an increase in foreclosures, but he told us it won’t be a tsunami, like last time. He said in a recent Real Wealth webinar, “We’ll definitely have some fallout. There’s no way you lose 36 million jobs and nothing bad happens. It’s inevitable.”
During that same webinar, Auction.com’s Daren Blomquist said, we’re seeing the highest unemployment rate since the Great Depression. He says, “You are going to have some impact. There will be some number of jobs that don’t come back.”
There could also be more help from the government that changes this dynamic entirely. One example is a bill being discussed in California. Rick says, the bill would add another 180-day ban on foreclosure activity after the pandemic is declared over. He said, “It’s conceivable that you could have 180 days of forbearance, followed by another 180 days of forbearance, followed by a 180-day moratorium, followed by what usually takes 90 to 120 days to get a lender to put a borrower into foreclosure.”
He said, Americans have $6.5 trillion in equity that they will try hard not to lose. The longer forbearance and/or moratorium timeframe will give people time to get reemployed, or to sell a home before it gets anywhere near foreclosure.
Investors who’d like to find a few good foreclosure deals may be able to do so, but it might not be as easy as it was during the Great recession. If you’d like to hear more from Rick and Daren on the state of the housing market, check out our webinar Where’s the Housing Market Headed Due to COVID-19. (3)
(1) CoreLogic: Delinquency Rates
(2) CoreLogic: Housing Analysis