As the COVID-related forbearance programs expire, it is unlikely that a foreclosure crisis will occur as 98% of the 1.618 million borrowers still in the programs have built no less than 10% equity in their homes. Additionally, the rising house prices may help provide a cushion for these borrowers.
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Extremely High Home Equity Levels
Since the start of the COVID-19 pandemic, more than 9 million households have enrolled in forbearance programs at some point, which allowed them to delay their monthly mortgage payments. Borrowers were given a maximum forbearance period of 18 months from the initial entry date. Most borrowers enrolled in March and April 2020. As a result, an estimated 400,000 expirations are expected in September 2021.
According to a report by Black Knight, a leading provider of data and analytics about mortgages and home equity, active forbearance plans in the second week of September fell by over 5% from the prior week. The drop was largely due to the number of forbearance plans that expired in August.
The run-up of home prices has resulted in high home equity levels. Struggling borrowers are in a much better position currently than at the beginning of the pandemic. Despite the number of borrowers in COVID-related bailout programs falling rapidly, the future of the borrowers still in trouble is not as grim as initially thought.
There are 1.6 million borrowers who are still in forbearance programs, representing 3.1% of the total outstanding mortgages and $313 billion in unpaid balance. However, 98% of these troubled borrowers have no less than 10% equity in their homes, excluding missed payments. When those payments are included, 93% have over 10% equity. Considering today’s housing market, most homeowners in forbearance could sell at a profit easily with the help of a real estate attorney.
In the second quarter of 2021, tappable equity — the amount of money homeowners can withdraw from their home’s value while retaining 20% equity or more — rose by $1 trillion collectively.
The strong home equity positions are likely to limit the number of distressed properties hitting the market and provide a strong incentive for people to resume making their mortgage payments, even by applying for a modification to make the payments more affordable.
Fast-Rising Prices
Home prices have risen rapidly, pushing the home equity level from a little more than $6 trillion at the beginning of the pandemic to a little over $9 trillion. According to CoreLogic, the home prices in July had risen by a record 18% since the same month last year. Home prices have continued to appreciate because of a combination of pandemic-induced factors and longer-term trends, such as:
- Millennials reaching prime homebuying years, increasing the demand for purchasing a property
- Renters looking to avoid skyrocketing rents
- Demand for increased living space because of work and education from home
- Investors with deep pockets driving demand
ATTOM Data Solutions reported that, despite the high equity and prices, foreclosure starts increased in August by 27% from July and 60% from August last year, when the foreclosure moratorium was fully in force. The seemingly large jumps were, therefore, based on a period of very low foreclosure activity. In August 2019, when there was normal foreclosure activity pre-pandemic, the foreclosure starts were over three times as high as August this year.
Foreclosure activity is likely to increase in the next few months as states try to catch up on the foreclosure filings that were not processed in the pandemic period and as the loans that went into default before the moratorium return to the foreclosure process. Nevertheless, distressed properties are not expected to flood the market. Foreclosure levels are likely to stay below normal levels for the rest of the year.
