No Tsunami of Foreclosures this Time

[Andy Mirza]

At the beginning of the pandemic, I remember seeing a lot of posts from people regarding an upcoming "tsunami" of foreclosures. Better be ready to take advantage of this opportunity!

I had my doubts back then but, the more time goes on, the more I think there won't be anything close to what we saw in 2009. Here are the reasons why I think this:

1. Underwriting for post 2009 loans was far stricter than last time. Sure, there were probably some loans that shouldn't have been made but not nearly on the scale of pre-2009. Post 2009 loans have more credit worthy borrowers, in general, which have a better chance of dealing with delinquencies.

2. Government stimulus means more help for borrowers. This time the stimulus came before the crisis. Lots of sources for borrowers in trouble to go to.

3. Strong job market - currently, there are more jobs out there than people looking for them. When will it re-balance? Hard to tell. The last of the federal jobless benefits have been turned off. Lots of people retired early. Fantastic availability of jobs means it's easier for borrowers to earn money to pay their mortgages.

3. Strong real estate market - for post 2009 borrowers, if you're in trouble and aren't getting help from the government or can't get a job, you most likely have equity in this frothy real estate market. You can sell your property, avoid foreclosure, and walk away with cash. 

Hopefully, the real estate market will cool but I don't see it doing more than flatten. The COVID lockdowns prevented a lot of homebuilding and I think it'll take a while for supply to catch up.

4. Loan Modifications after Forebearance - ok, you didn't get enough stimulus, can't get the right job, but don't want to sell. You got a forbearance but still can't swing it. No worries, lenders are using a tool that they used last time: deferred principal. We'll just take the arrears and put it on the back of the loan for you.

I talked to a loan seller a few months ago and he said that they had prepared for a huge amount of incoming forbearance requests that never materialized. The actual amount of borrowers getting a forbearance was far lower than they expected.

Another friend who works for a big title company saw her workflow change from a huge amount of forbearances to a huge amount of loan modifications. She called multiple people to set up dates to sign closing documents. She would get these calls from confused borrowers who had no idea that their lenders were offering loan modifications to reduce their rates when they weren't in default and had never contacted the lender.

After 2009, government & big lenders did everything they could to dial down foreclosures and are better prepared for it this time. If we do see a surge in non performing notes, it will be absorbed by note funds and note investors. Yes, foreclosures will go up to a more normal level, maybe even higher, but it won't be anything like 2009.

That's my opinion for the record!