Forbearance and Foreclosure
Forbearance jumped into the forefront of housing issues in March 2020 with the beginning of Covid. The federal government immediately enacted a plan to allow homeowners to defer payments on mortgages. While it had the ability to do that on mortgages controlled by the federal government, it did not have the authority to do so on private mortgages. The federal mortgages included those owned by Fannie Mae and Freddie Mac as well as those guaranteed by FHA, VA, USDA. Federal mortgages at Fannie Mae and Freddie Mac comprise about 60% of mortgage loans; FHA and VA bring that ratio still higher. Now 20 months later, how do forbearance and foreclosure go together?
At the end of November 2021, delinquencies remain about 2.5x the level of 2019, prior to the pandemic. With forbearance exits mainly completed, this may represent those borrowers unable to structure an exit. If so, that could represent up to 1 million borrowers in severe trouble.
Now that the forbearance and Covid actions have expired, what can delinquent borrowers expect? If income has not returned to a level to support the loan, borrowers need to face reality. Foreclosure may be imminent. That has not been the case so far. A data firm found that nearly a third of borrowers who start the foreclosure process with at least 40% equity in their homes go to foreclosure anyway. That means the borrower loses unless the borrower sells. A borrower may not be able to buy another home immediately since income hasn’t returned. But financial reality means selling, pocketing the money, and renting for a period of time. Why let 40% of the value of your home vanish?
7.7 Million
The number of homeowners who have participated in forbearance at some point over the past 18 months has now climbed to 7.7M. Approximately 15% of all U.S. mortgage-holders sought to delay payments according to Black Knight, a large mortgage solutions provider ( reported in October 2021). The Federal Housing Finance Agency (FHFA) oversees Fannie Mae and Freddie Mac. FHFA estimated the forbearance and foreclosure programs will cost the Fannie Mae and Freddie Mac alone $7 billion to $8 billion over the next two-to-four years. Of that total cost, the office expects $4 billion in anticipated default costs.
That doesn’t mean $4 billion in loans go into default. That means losses of $4billion result. With the require private mortgage insurance, the losses may be only 10% or less on each home. If the average loan amount of a home totals $250,000, that equate to 150,000-200,000 foreclosures for Fannie and Freddie. The figure excludes FHA, VA and other government guaranteed loan programs. Typically, FHA defaults run 3 times the level of Fannie Mae and Freddie Mac defaults. That could mean a giant hole in FHA finances.
Foreclosure Pipeline
The FHFA forecast is $4 billion in foreclosures for Fannie Mae and Freddie Mac. Conservatively, add another $4 billion for FHA. Typically, these should start showing up in the 4th quarter of 2021 and 1st quarter of 2022. Due to the regulations required a certain number of months delinquent prior to filing foreclosure, early 2022 is more likely. However, foreclosure filings already began spiking higher at the end of the 3rd quarter of 2021. Will the total foreclosure count end up at 300,000 to 400,000 homes as the price tags for Fannie Mae, Freddie Mac, and FHA indicates? What about privately held mortgages?
Will this provide a buying opportunity? Zillow plans to unload 7,000 houses it overpaid for beginning very soon. FOMO played a major role in the run up of prices for home over the past year. Those who plan, save and approach buying a home with the understanding how this major investment can help or hurt your financial future will have the edge over the next year.
October Foreclosures Increase
Foreclosure filings increased in the fourth straight month following the July 31 expiration of the moratorium. ATTOM says those filings were up 5.0 percent in October compared to September. 20,587 properties were the subject of a default notice, scheduled auction, or actual bank repossession. This represents 76 percent growth from the prior October when the moratorium was in effect.
The filings affected one in every 6,675 housing units during the month. The rates were highest in Illinois (one in 1,923 units); Florida (one 3,180); and New Jersey (one in 3,438). Nevada and Ohio had the fourth and fifth highest rates.
Among large metropolitan areas, those with a population exceeding 200,000, the rate was highest in St. Louis, Trenton, and Miami.
FHA’s Mortgage Insurance fund’s capital ratio reached 8.03% at the end of September, up from 6.10% a year ago. FHA still has a long list of concerns. The volume of significantly delinquent mortgages is now $110 billion. Unemployment among its borrowers remains high. A risk of fast-rising mortgage rates could make home retention and loss-mitigation tools more expensive. Forbearance exits may be costly. Don’t look for HUD to reduce FHA mortgage insurance premiums in the near term. According to many lenders, lots of borrowers already don’t bother with FHA loans because of the high Mortgage Insurance rates. They’d rather wait until their credit scores improve and they can get a conventional loan.