How Will Loan Forbearance Affect the Housing Market?

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As we enter the fourth quarter of 2020, the U.S. is facing housing market pressures from all sides. In all of the speculation and data hunting, there is one thing nobody seems to be talking about: Will the increase in loan forbearances triggered by the COVID-19 pandemic alleviate the low inventory pressure and actually lead to more properties on the market? Is there relief on the horizon for markets that are well below the healthy six months of inventory? 

It’s hard to tell, with dozens of factors to consider and hundreds of data points to mull over—but the answer in short is, “most likely.” Based on the numbers so far and the experts’ interpretation of the data, it looks like inventory will increase, releasing pressure on today’s red-hot markets—but that it won’t increase in the way that you think, and certainly not in the timeline that you are hoping for.

Will there be a loan delinquency spike?

With the highest unemployment numbers in 80 years hitting in April, we saw a consecutive 27-month decline in mortgage delinquency fall apart, according to CoreLogic’s Loan Performance Insights Report. The numbers from June 2019 to June 2020 increased by 3.1% for mortgages that were at least 30 days late, with Nevada, New Jersey, New York, and Florida at the top of the list for states with the most delinquency rates. 

One sobering quote from the report reads, “CoreLogic predicts that, barring additional government programs and support, serious delinquency rates could nearly double from the June 2020 level by early 2022.”

The impact of forbearance on loan delinquency

Thanks to the CARES Act, homeowners delinquent on payments can easily enter a forbearance program with their lender, reducing or delaying payments for up to 90 days and, in some cases, up to a year. There is also an option for many homeowners to then extend those programs for an additional 90 days or more if they are experiencing continued hardship.

There was an immediate spike in forbearances from the end of March to the beginning of May, with more than 4.5 million homeowners taking advantage of a forbearance plan. The numbers have tapered off a little going into early September, with only 3.7 million mortgages in active forbearance, according to Black Knight Financial Services—in other words, about 75% of plans have been extended. To put that in perspective, 11.1% of all FHA/VA loans and 4.8% of all GSE-backed loans are in forbearance right now. 

In the same data, Black Knight reports that 1.7 million of those forbearance plans are set to expire in September, which means this is an ever-evolving situation that may yet surprise us. “Forbearance has been an important tool to help many homeowners through financial stress due to the pandemic,” said Frank Martell, president and CEO of CoreLogic. “While federal and state governments work toward additional economic support, we expect serious delinquencies will continue to rise.”  

As of early October, there has been no plan put forward in the House or Senate that looks like it will pass any time soon, but I think we may see something agreed on before election night to try and curry favor with last-minute voters. The Democrat’s proposed plan, the $2.2 trillion HEROES Act, would extend unemployment benefits, some housing and food benefits, and even more payroll protection funds, all of which could turn around a homeowner’s finances at the end of their forbearance plan.

Yes, foreclosures will rise

The correlation of forbearance and increase in foreclosures comes from the fact that forbearance is an early intervention Band-Aid, meant to bridge the gap between when hardship begins and a change in the homeowner’s situation. In oversimplified terms, more forbearance tends to lead to more foreclosures, which typically leads to more inventory in the market in the form of bank-owned foreclosures (REOs). 

Even though unemployment is declining, there are always borrowers who may not be lucky enough to be part of the recovery, especially in tourism-based economies that can’t recover while COVID-19 still spreads. Sometimes a forbearance merely delays the inevitable. With no other options, and denied continuation of forbearance, these homes will slip into the foreclosure cycle. 

During the Great Recession, in the first half of 2010, 1.65 million American homes went into foreclosure, according to ATTOM Data Solutions. In the first half of 2020, barely 165,000 loans were hit with foreclosure actions. ATTOM predicts that number could double by mid-2021. Compare that with 2008 through late 2011 when 600,000 to 950,000 homes faced possible foreclosure.

Why today’s rise in inventory is different

This is where we will diverge hard from the Great Recession. As mortgages default and pre-foreclosure begins, homeowners will have so many more options. I’m afraid the opportunists waiting on the sidelines for a repeat of 2008 will be sorely disappointed, based on the ATTOM data.

Homeowners have more equity than ever thanks to eight years of “almost unceasing increases” in housing prices, according to ATTOM Data Solutions. Instead of seeing a rise in REOs flooding the market, the increase in inventory will come more from homeowners that can sell and still make money on their home, not from banks looking to offload their inventory cheaply. 

Even with the slight bump in inventory, I doubt it will push us over the six-month inventory mark and flip any major metro areas from a seller’s market to a buyer’s market. The homes that will hit the market won’t go for pennies on the dollar, but for at or close to market rate. Historically low interest rates will also drive demand for these homes that hit the market due to pre-foreclosure concerns, and markers of a strong seller’s market, such as multiple-offer scenarios and waived inspections and appraisals, will continue. A seller’s market, low interest rates, and employment bouncing back could smooth over any bumps the market would typically see with an increase in inventory. 

When will we see relief?

Housing markets across the U.S. will likely find relief from low inventory around June or July 2021—well before any forbearance properties in the system actually finish the foreclosure process. With an unknown stimulus plan in the works, this could occur even later if moratorium on foreclosures and evictions get extended. 

The typical timeline is four months of missed payments before action is taken on initiating foreclosure. In most states, the homeowner is then notified of foreclosure action and has an additional four months before the foreclosure sale date. This means we would be in August 2021 at the earliest before failed forbearance properties would hit the market as bank-owned REO listings. 

Again, since homeowners have more options now to exit a bad financial situation than in 2008, we could see these listings spread out over the first eight months of next year. With equity, homeowners in trouble can just list and sell their properties without needing to short sale or foreclose. The increase in inventory seems inevitable, but likely so minor it won’t offer any relief to the low inventory we have now. 

There are too many options available now, compared to the Great Recession, for any homeowner to have to let their home go all the way to foreclosure. The professionals that will benefit the most are real estate agents who are able to get in front of these sellers and sell their homes at close to a retail price, taking advantage of the strong seller’s market.

What effect do you think loan forbearance will have on the housing market?

Let us know in the comments below.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.