Federal foreclosure moratorium extended through mid-year

The foreclosure moratorium that has kept jobless Californians in their homes during the ongoing recession has been extended yet again.

The foreclosure moratorium is now in place through June 30, 2021. The enrollment window for mortgage forbearance programs is also extended through June 30 and an additional six months of forbearance is provided to homeowners enrolled in a forbearance program before June 30, 2021.

Of those 2.7 million U.S. homeowners currently in forbearance programs, 2.1 million are delinquent on their payments. The remaining 600,000 are making payments.

Further, 1.1 million homeowners are delinquent on their mortgages and not enrolled in a forbearance program. These homeowners may be headed for foreclosure immediately upon expiration of the foreclosure moratorium.

As the expiration continues to be pushed back and delinquent levels build, it leads us to question what will happen when the expiration deadline finally does arrive. Will a flood of foreclosures hit the market, as during the fallout from the 2008 recession?

firsttuesday has forecasted the end of the moratorium will impact home sales volume and prices later in 2021. But the extent and duration of the impact will continue to depend on government intervention. After all, California alone is still missing 1.4 million jobs compared to the December 2019 peak. Without jobs, homeowners and renters will be unable to resume paying their housing payments when the moratorium is up, let alone pay back missing payments.

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Foreclosure moratorium expiration looms — what then?

An alternate path

The Urban Institute believes the consequences of the moratorium expiration may not be as bad as many expect.

First, the Urban Institute notes Fannie Mae and Freddie Mac — which cover roughly two-thirds of U.S. mortgages — have established a “loss mitigation waterfall” which allows homeowners to push the payments accumulated during the forbearance program through to the life of the loan. Thus, they will not owe a lump sum of missed payments at the end of the forbearance period, simply continuing their pre-forbearance payment. As long as these homeowners are able to obtain a job with roughly the same level of income as before they entered the program (presumably due to a job loss), they will be able to resume mortgage payments, avoiding foreclosure.

The Urban Institute also points out that many of these delinquent homeowners not in a forbearance plan may actually have sufficient home equity to sell their home without the need for foreclosure. Since home values have yet to decline during this recession, this positive equity condition is a stark contrast from the 2008 recession, which plunged those who purchased during the latter half of the Millennium Boom into negative equity. Underwater and jobless, a distressed sale was the only option. That is not the case in 2021.

While positive equity and the ability to put off repaying missed payments will be enough for some, they will not save everyone from foreclosure.

The underlying recession accompanying the pandemic continues to hinder the jobs recovery, hence the continued need for the band-aid solution of additional stimulus payments. It’s impossible to believe that all jobs lost will be fully returned by mid-2021. (For comparison, it took over a decade for California to regain all jobs lost when counting population gain following the 2008 recession).

Therefore, even if everyone in a forbearance program takes advantage of the option to push the missed payments down the road, there will still be plenty of homeowners not in a forbearance program who will be forced to sell their home, be it through foreclosure or through a traditional positive equity sale. Either way, multiple listing service (MLS) inventory will swell. Rising inventory, alongside the recent increase in interest rates which has reduced purchasing power, will tip the market into a vicious cycle, and home values will decline, pushing more homeowners underwater.

To be certain, no one expects the same level of foreclosure crisis that occurred in the years following the Millennium Boom. But real estate professionals who prepare now for the return of distressed sales will be in the best position to continue to make a living in the coming months when the shifting housing market emerges.

Related page:

Moratorium Watch 2021