There was a slight uptick in foreclosure filings in the U.S. as the pandemic continues, and an agreement on a new stimulus to help ailing homeowners has stalled. Real estate data firm CoreLogic released a report that shows serious delinquencies spiked in June. Without government assistance or major job market improvement by the end of the year, those delinquencies could turn into foreclosures.
The CoreLogic report shows that 2.9% percent of U.S. home loans were overdue by 90 to 119 days in June. That’s the highest they’ve been in 21 years, according to CoreLogic’s chief economist Frank Nothaft. He says, “If there are new government programs, maybe that alleviates some of the risks, but given what we know today, we could be looking at a serious delinquency rate that is four times higher at the end of 2021 than it was before the start of the pandemic.” (1)
The national delinquency rate for all loans more than 30 days late, and those already in foreclosure is 7.1%. That’s a 3.1% point increase compared to June, when the delinquency rate was 4%. The June result is also the third month in a row that delinquencies rose after more than two years of decline. (2)
Forbearance Counts as Delinquency
Many of those delinquencies are loans in forbearance. Financially-impacted homeowners received permission from lenders to postpone their monthly payments, but even though they have permission to do so, those loans are still considered delinquent.
Mortgage Bankers Association says there are currently about 3.6 million loans in forbearance. Homeowners with government-backed loans are getting as much as 12 months of forbearance as part of the CARES Act. (3)
There have been calls for another stimulus package to help both homeowners and renters, and the Democratic-led House passed a $3 trillion dollar package called the Heroes Act several months ago, but negotiations between Democrats and Republicans on a final agreement have come to a standstill.
Serious Delinquencies Expected to Rise
CoreLogic CEO, Frank Marell, said in a statement, “While federal and state governments work toward additional economic support, we expect serious delinquencies will continue to rise, particularly among lower-income households, small business owners and employees within sectors like tourism that have been hard hit by the pandemic.”
Although delinquencies have risen in all states, they are the highest in 19 virus hot spots. At the top of that list is New Jersey, New York, Nevada, and Florida. Miami has been particularly hard hit by serious delinquencies. They are up 5.1% there. A few of the other hard-hit metro areas include New York, Las Vegas, Houston, Chicago, and Washington, D.C.
The Delinquency Funnel
The unemployment situation has improved since the pandemic began but it’s still far from what it needs to be to keep many homeowners afloat. The report says, “Sustained unemployment has pushed many homeowners further down the delinquency funnel.” It says, “With unemployment projected to remain elevated through the remainder of 2020, we may see further impact on late-stage delinquencies and, eventually, foreclosure.”
The report says that millions of families could lose their homes through short sales or foreclosures, and that could put pressure on home prices and the value of home equity. As many of you know, the last foreclosure crisis happened in 2007 and peaked in 2010. That crisis was preceded by a housing boom, along with poor underwriting standards and the granting of loans to people who couldn’t afford them.
When the market collapsed, home values plummeted, and homeowners ended up owing more on their homes than they were worth. That’s known as being “underwater” on the loans. With little equity in their homes, many walked away. It created a bonanza for real estate investors who snapped up distressed homes and started renting them out. It changed the dynamics of the housing industry to such a great degree, it gave birth to the idea of a “renter nation.” This could happen again, but probably on a much smaller scale.
There are many differences between now and a decade ago. Banks have learned that flooding the market with foreclosures is not good for the asset values they are trying to sell. Instead of foreclosing, many banks opted for loan modifications, whereby borrowers could pay the amount owed at the end of the loan. Many banks also opted to act like flippers, fixing up distressed properties and selling them at retail prices. And even some banks got into the rental business, opting to find a tenant for the property rather than sell it for a discount. In this case, I am guessing the banks will opt for a loan modification program that will allow borrowers to stay in their homes, and make those back payments at a later date — often at the end of the loan. Time will tell.
The CoreLogic data is for June, and we’re now in September, as the pandemic continues to weigh on our economy. We’re also headed into a volatile presidential election, and we don’t know yet if, or when, there might be a vaccine. Forbearance will protect many homeowners for several more months, but without a more substantial job market comeback, a cure for this virus, and less divisiveness among our political leaders, we may see those delinquencies turn into short-sales and foreclosure auctions.
As investors, be prepared. It’s an opportunity that may present itself for a second time for many people in the real estate industry.