With the opportunity to enter a COVID-19 forbearance program now ended as of September 30, 2021, the only way forbearances can trend now is down. But, what will happen as these protections decline?
The share of loans in a forbearance program continued to decrease, at 2.1% at the end of October 2021, representing 1 million homeowners in forbearance nationwide. These homeowners are unable to make their mortgage payments. While they are in a program, the lender agrees to temporarily forgo an exercise of their right to call the mortgage due and pursue foreclosure while the homeowner is taking steps to bring the mortgage current.
Of these mortgages presently in forbearance:
- 74% are in an extension program;
- 16% are in their initial forbearance program; and
- 10% are forbearance re-entries, according to the Mortgage Bankers Association (MBA).
While the vast majority of mortgages in forbearance are in extension, the total share of loans in forbearance has consistently declined since peaking at 8.5% in June 2020.
The 3.2 million homeowners who have exited forbearance plans since the mid-2020 peak have mostly been able to keep their home. However, many have been forced to seek a loan modification, sell, or resign themselves to an eventual foreclosure now that the foreclosure moratorium is over.
Forbearance exits during the peak June 2020 through October 2021 period saw:
- 29% exit with a loan deferral or partial claim;
- 20% exit with the proven ability to make their regular mortgage payments;
- 17% exit unable to make payments and without a loss mitigation plan;
- 13% exit with a loan modification in place;
- 12% exit with full reinstatements, meaning they were able to pay back the amounts past-due; and
- 7% exit by paying off the loan by refinancing or selling.
Thus, most homeowners exiting forbearance in the second half of 2021 are doing so in good enough standing to keep their home, one way or another. However, 17% of forbearance exits are in the air, unable to pay and likely headed for a foreclosure or a forced sale. A further 7% may be unable to pay, but were able to benefit from high levels of home equity to either sell or refinance their home and avoid default.
Job losses extend forbearance need
Just over 1 million Californians are still unemployed compared to the pre-recession peak. A mix of renters and homeowners, these jobless residents are largely unable to make their housing payments. Protections from eviction and foreclosure remained in place through the end of September 2021, but now that these are gone, so is their safety net.
Further, the significant share of homeowners exiting forbearance who seek loan modifications shows the ongoing need for assistance, according to an MBA analysis.
Thus far, the success of forbearance plans have kept millions of people in their homes — and kept these homes off the market. However, that will soon change.
As long as California’s jobs recovery remains out of reach, the need for forbearance will continue. But as these forbearance plans now wind down and jobs are still absent, many will inevitably choose to sell when able (read: when they possess sufficient home equity to cover their mortgage principal along with missed payments). When they lack enough equity, they will be forced to choose foreclosure. Either way, some major additions to the for-sale inventory are on the horizon.
For a sign of a return to normalcy, real estate professionals can watch their local jobs recovery closely. At the current start-and-stop recovery pace, expect a stable recovery of jobs to begin around 2024. Until then, expect volatility in home sales volume, prices and inventory to continue.
Like you say, there are a huge number of mortgages still in distress. The Fed and Govt. are the puppet masters and it’s ironic that the same ones creating these asset price distortions are also the ones keeping owners out of foreclosure. But that interference is going away. The only thing keeping this party going is the Fed QE and debt. The Fed takes away QE and the GFC of 2008 will look like child’s play.