A Foreclosure Crisis Could Still Happen

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Homeowners are falling behind on their payments, but government
policies are keeping them in their homes.

When the coronavirus pandemic hit in March, millions of
Americans almost instantly lost their jobs, and millions more have
since joined them.
More than 32 million
people are now receiving some form of
unemployment benefit.

Sensing that the sudden collapse of the economy could put
millions of homeowners on the street in the middle of a pandemic,
the Federal Housing Finance Agency (FHFA) implemented measures in
March to ensure that doesn’t happen. Protections include a
moratorium on foreclosures for anyone on a mortgage backed by the
federal government and up to a year of forbearance for those
suffering financial hardship. The economic fallout from the
pandemic has been dramatic, but when it comes to homeowners, this
hasn’t been 2008.

The protections have worked: June saw the fewest active
foreclosures since 2000. But with the moratorium set to expire on
August 31, mortgage-delinquency rates are jumping as the pandemic
rages on, showing that any lapse in government policy could cause a
minor housing crash.

Even after the foreclosure moratorium expires, homeowners on a
government-backed loan will have a forbearance option to fall back
on, so there’s no need to panic just yet. But digging into
mortgage-delinquency data shows how much water is building behind
the dam that is these government backstops.

In January, just 3.22 percent of mortgages were in delinquency.
By May, that number shot up to 7.76 percent — about three points
shy of where the delinquency rate peaked during the financial
crisis of 2008, which was at 10.57 percent.

Prior to the the pandemic in March, the number of mortgages in
forbearance was fewer than 100,000. Currently, there are roughly
4.5 million mortgages in forbearance, although this is obviously a
reflection of homeowners having the option of forbearance, but it
gives you a sense of the scope.

Not every homeowner in forbearance is past due on their
payments; some went into forbearance as a precaution, or just
because they could. Some homeowners were in forbearance and have
since gotten out, either because there didn’t end up being a need
or they got a new job. For June, 21 percent of mortgages in
forbearance were current on their payments, but as the pandemic
goes on, more will enter into serious delinquency that would
normally trigger a foreclosure.

These are national numbers, and each city is its own housing
market. A foreclosure crisis in Dallas wouldn’t necessarily
impact the market in Seattle. Looking at delinquency by city shows
that the biggest jumps in delinquency have occurred in places hit
hardest by the pandemic, either by the virus itself or the economic
fallout — cities in Florida, along with the Northeast,
California, Texas, Las Vegas, and some cities in the Deep
South.

Taken together, this data shows that if not for the FHFA’s
actions, a serious foreclosure crisis would be under way. If at any
point the protections are rescinded, that problem could still
materialize. Given the erratic response to the virus from federal,
state, and local governments — in addition to a potentially
explosive national election — it’s hard to take any federal
policy as a given over the next year.

Look no further than recent housing-market forecasts for proof.
With the forbearance option available for up to a year, economists
have baked into their models a wave of foreclosures in the spring
of 2021, which they say would cause a very rare drop in U.S. home
prices.

Source: FS – All – Architecture 10
A Foreclosure Crisis Could Still Happen