Why this matters: Households are struggling to make ends meet in today’s post-pandemic economy as many forbearance arrangements made to avoid foreclosure during the period are now delinquent, signaling an impending rise in owners forced to place their property on the market available for sale.
The struggle to stay current
Nationwide, a tug of war is underway in the real estate recession evolving since mid-2022 as the faded pandemic era aid which kept homeowners afloat is gone. During 2020-2021, homeowners entered forbearance programs in significant numbers.
These programs accommodated payment deferrals through loan modifications and refinancing to keep delinquency levels low during two years of extreme economic distress. The foreclosure-avoidance maneuvers reduced owner turnover to the extent available for-sale-inventory declined.
At the same time, a reservoir of able buyers built up in 2020 suddenly became willing buyers in 2021 with the win of lowest-ever mortgage rates. This 2021 concurrence sent home prices up around 30%, peaking in mid-2022.
Forbearance plans provide temporary relief by reducing mortgage payments or offering no mortgage payments for a specific period of time. However, any missed amounts are due at the end of the forbearance period. Nationally, around 180,000 homeowners are currently in forbearance plans, an estimate of the Mortgage Bankers Association (MBA).
For the first quarter of 2025, despite overall national delinquency and foreclosure rates below historical averages, foreclosures increased in all mortgage categories, but particularly Department of Veteran Affairs (VA) mortgages, the MBA reports.
Forbearance agreements benefit homeowners the most when they are at serious risk of foreclosure. At the end of 2024, the FHFA reported these plans contributed to a decline of:
- 9% in foreclosure starts; and
- 6% in unconventional sales and foreclosure sales.
However, the decline in foreclosure activity did not happen because of better household financial conditions. The moment foreclosures started to decline, forbearance plans increased to eliminate what was appearing as household solvency.
Nationally, newly-initiated forbearance plans rose 52% in the fourth quarter of 2024 over the third quarter.
As the federal foreclosure moratorium ended, those homeowners with mortgage modification agreements had to comply with their new payment schedules or face foreclosure.
But crucially for homeowners in forbearance programs, a loss of jobs is expected through the 2026 period, introducing another wave of instability for mortgaged homeowners.
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From a national emergency to a household one
California’s rate of delinquency with Fannie Mae and Freddie Mac is lower than the national average, but growing. In the fourth quarter of 2024, the most recently released data, California’s delinquency rose 4.8%.
Of troubled borrowers, 27.6% had missed three or more payments which triggers an approximately one-year process of notices, workouts and foreclosure procedures before a trustee’s sale may take place.
Most property encumbered with mortgages originated during the past five years have a positive equity when sold now. Thus, a troubled owner selling today most likely receives cash net proceeds on closing.
Conventional sales will continue until for-sale inventory builds to a six to nine month supply. At that point for inventory, prices start to drop and eliminate the net equity in property mortgaged in recent years, creating a negative equity financial condition.
When delinquency rates become seriously inflated, remember foreclosure proceedings are generally the consequence of both negative equity and a household income shock (e.g., loss of job, divorce, loss of health, death, mortgage resetting, etc.).
Thus, a sale by an owner-in-foreclosure situation is deemed an unconventional short sale. To close escrow on the sale, the mortgage holder agrees to accept a discounted payoff of the amount owed as satisfaction of the debt and releases the trust deed lien from title. The lender’s alternative is a foreclosure sale with the lender typically becoming the proud owner of another (Real Estate Owned) REO property.
Since the end of 2023, the primary reason for delinquency was an adverse change in personal income. But California represents the 4th largest rate of deeply delinquent (365+ days) mortgages among the states. The likely reason is California had a flat-lined total number of jobs during the years since 2019.
A huge surge in low-income residents departed California with about half as many high-income earners with valuable skills coming into the state. Births made up the other half of losses along with emigration. The primary culprit is the inequality of home costs which the state government has worked to cure.
To complicate the outlook for delinquencies and foreclosures, unlike any period since 2013, the country’s economy finds the population fully distracted from normal daily routines and growing uncertain about their future. Concerns vary from global trade wars redistributing business profits by the government mandating the winners and losers, heightened worldwide military action and international border lockdowns barring immigration required for extensive types of labor native-born Californians will not perform.
For California’s 58,835 delinquent Fannie Mae and Freddie Mac mortgages in Q4 2024, not all homeowners took advantage of forbearance programs to keep their head above water until the next wave of uncertainty hits.
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Delinquent homeowners have not taken advantage of forbearance programs
Dragged down by uncertainty
Forbearance plans represent a particular temporary solution requiring a repayment plan when the forbearance period ends.
The ripple effect of highly-leveraged property owners forced to become sellers coincides with an increasing for-sale inventory. Additionally, the incidence of high mortgage interest rates over the past three years — likely to continue — lowers the borrowing capacity of mortgage-funded buyers, but also lowers the value of property.
The buyer-demand-side reduction in available capital – cash – to purchase property eventually forces sellers to either adjust prices downward to steer their property into escrow or remove the property from the for-sale market.
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Whether homeowners are able to recover lost income sufficient to cure delinquencies and reduce foreclosure rates before excess inventory for sale and high mortgage rates pushes the value of their home underwater with negative equity is far from certain.
Likely, the trend in California home sales now shaping up is one of developing chaos. Statewide politicians understand what needs to be done – construction in a huge way, now — to create a selection of inventory in low-price tiers. However, the follow-up of local politicians is a lockdown in local real estate activity, an eventual death dive for local property values.
We add: Real estate licensees choosing a pivot for their fee-earning services can expand their practice by focusing on transactions more likely to take place during a recession. Proactive agents and brokers will look for alternatives, learn to assist delinquent homeowners, and grow their practices as others suffer a downturn.
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