4 Major Reasons Households in Forbearance Won’t Lose Their Homes to Foreclosure
There has been much discussion about what will happen when the 2.3 million households currently in forbearance lose their program's protection. Some assume there could potentially be millions of foreclosures ready to hit the market. However, there are four reasons why this will not be the case.
1. Almost 50% Leave Forbearance Already Caught Up on Payments
According to the Mortgage Bankers Association (MBA), data through March 28 shows that 48.9% of homeowners who left the program were current on their mortgage payments.
- 26.6% made their monthly payments during their forbearance period
- 14.7% brought past due payments current
- 7.6% paid off their loan in full
This isn't to say that the remaining two million people in the plan will be treated the same way. However, it does provide some insight into the possibilities.
2. The Banks Don’t Want the Houses Back
Banks have learned lessons from the crash of 2008. Lenders don't want to deal with the hassles of handling foreclosed homes. This time, they're assisting homeowners to help them stay in their homes.
The Federal Housing Finance Agency, for example, backs about 50% of all mortgages (FHFA). In 2008, the FHFA provided Home Retention Action to 208,000 homeowners, which are options offered to borrowers who have the financial resources to join a workout option but want to remain in their home. Home retention options include temporary forbearances, repayment plans, loan modifications, or partial loan deferrals. These helped delinquent borrowers stay in their homes. Over the past year, the FHFA has offered that same protection to over one million homeowners.
Almost all lending institutions today work with their borrowers. According to the MBA study, of those homeowners who have abandoned forbearance,
- 35.5% have worked out a repayment plan with their lender
- 26.5% were granted a loan deferral where a borrower does not have to pay the lender interest or principal on a loan for an agreed-to period of time
- 9% were given a loan modification
3. There Is No Political Will to Foreclose on These Households
The government also seems determined not to let individuals or families lose their homes. According to a recent Bloomberg report:
“Mortgage companies could face penalties if they don’t take steps to prevent a deluge of foreclosures that threatens to hit the housing market later this year, a U.S. regulator said. The Consumer Financial Protection Bureau (CFPB) warning is tied to forbearance relief that’s allowed millions of borrowers to delay their mortgage payments due to the pandemic…mortgage servicers should start reaching out to affected homeowners now to advise them on ways they can modify their loans.”
The CFPB is proposing a new set of guidelines to ensure people will be able to retain their homes. Here are the major points in the proposal:
- The proposed rule would create a special pre-foreclosure review period, which would prevent servicers from initiating foreclosure proceedings until after December 31, 2021.
- Based on the evaluation of an incomplete application, the proposed rule would allow servicers to provide some streamlined loan modification options to borrowers with COVID-19-related hardships.
- The proposed rule seeks to make temporary changes to certain required servicer communications in order to ensure that borrowers receive important details about their options at the right time.
A final decision is yet to be made, and some do question whether the CFPB has the power to delay foreclosures. The entire report can be found here: Protections for Borrowers Affected by the COVID-19 Emergency Under the Real Estate Settlement Procedures Act (RESPA), Regulation X.
4. If All Else Fails, Homeowners Will Sell Their Homes Before a Foreclosure
Homeowners have record levels of equity today. According to the latest CoreLogic Home Equity Report, the average equity of mortgaged homes is currently $204,000. In addition, 38% of homes do not have a mortgage, so the level of equity available to today’s homeowners is significant.
Just like the banks, homeowners learned a lesson from the housing crash too.
“In the same way that grandparents and great grandparents were shaped by the Great Depression, much of the public today remembers the 2006 mortgage meltdown and the foreclosures, unemployment, and bank failures it created. No one with any sense wants to repeat that experience…and it may explain why so much real estate equity remains mortgage-free.”
What does that mean to the forbearance situation? According to Black Knight:
“Just one in ten homeowners in forbearance has less than 10% equity in their home, typically the minimum necessary to be able to sell through traditional real estate channels to avoid foreclosure.”
The reports of massive foreclosures about to come to the market are highly exaggerated. As Ivy Zelman, Chief Executive Officer of Zelman & Associates with roughly 30 years of experience covering housing and housing-related industries, recently proclaimed:
“The likelihood of us having a foreclosure crisis again is about zero percent.”