Fewer loans in forbearance means more inventory on the horizon — but is it enough?

The share of U.S. mortgage loans in forbearance steadily decreased in 2021.

Under a mortgage forbearance program, the servicer temporarily forgoes their right to call the mortgage due and pursue foreclosure while the homeowner takes steps to bring the mortgage current. 2020-2021 saw heightened numbers of homeowners in these programs — it was a time consisting of record-low foreclosures and low inventory, despite high levels of job loss due to the recession and pandemic.

Forbearance is still an option for some distressed homeowners, but streamlined enrollment under the Coronavirus Aid, Relief and Economic Security (CARES) Act has not been an option since September 2021. Homeowners may still request to enroll in a forbearance program, but it’s now up to the discretion of each servicer.

In November 2021, the share of mortgages in a forbearance plan decreased to 1.67%, according to the Mortgage Bankers Association (MBA). For reference, immediately before the pandemic and recession arrived in March 2020, just 0.25% of loans were protected under a forbearance plan. The share of mortgages in forbearance peaked at 8.5% in May 2020.

Around 835,000 homeowners are in a forbearance plan nationwide.

From June 2020 to November 2021, the share of homeowners exiting forbearance consisted of:

• 30% who exited with a loan payment deferral;
• 20% who exited current on payments;
• 17% who exited not current on payments;
• 14% who exited with a loan modification;
• 12% who exited with a reinstatement;
• 7% who exited with paid off loans through selling or refinancing;
• 0.8% who exited with a repayment plan; and
• 0.6% who exited with other results, such as a short sale or deed-in-lieu of foreclosure.

Related article:

Foreclosures, explained

Forbearance has helped keep inventory low — until now

Inventory remains at a historic low in 2022.

As of January 2022, the inventory shortage in California ranges from 30% below a year earlier in Los Angeles to 28% below a year ago in San Diego. In inland metros, the inventory shortage is not quite as significant, but still remains high, at 14% below a year earlier in Bakersfield, according to data from Zillow. But as forbearance exits increase, inventory will rise.

When a homeowner is unable to resume payments, a forced sale is preferred over a foreclosure. Rather than go through the onerous, credit-damaging process of foreclosure, a forced sale offers homeowners the chance to cash in on their home equity, especially following the rapid price increases of 2021. Forced sales are immediate inventory boosts, since — lacking the ability to make mortgage payments — these sellers will not purchase a replacement home.

Inventory will see a boost from forbearance exits, but will it be enough to meet demand?

Not even close — California has experienced a severe supply-and-demand imbalance for years, made only worse in 2020-2021. The only way out of the inventory hole we’ve dug here in California is through more residential construction, key for a stable housing market.

Construction starts steadily declined in 2019-2020, but started to gain ground 2021. Starts are looking at another two-to-three years of catching up to do, with obstacles in every corner, including:

• the 700,000+ jobs still missing in California as of November 2021 following the 2020 recession;
• tightened credit for homebuilders;
• building material shortages, which continue in 2022;
• rising mortgage rates, reducing borrowing capacity for homebuyers and builders alike; and
• California’s overly-restrictive zoning regulations, which stifle new housing where demand is highest.

A consistent increase in construction starts is key towards building back inventory and returning a sense of stability to California’s housing market. Look to the post-recovery period of 2024-2025 for the next strong showing in construction starts.