Real Estate Economy Watch - Forbearances: Pay Me Now Or Pay Me Later?
In late April, Congress passed the CARES Act, which included relief for homeowners suffering financially from the novel coronavirus. With memories still fresh of the housing crash and that depressed housing markets with a tsunami of foreclosures prices for a decade ten years, policymakers devised a way to provide homeowners time to recover financially by temporarily halting their monthly mortgage payments.
Beginning May 27, homeowners who are suffering financially from the pandemic can ask for a six- or twelve-month period of forbearance. When the period of forbearance ends, borrowers must work out a plan with their lenders to repay the missed monthly payments all at once. These plans may include refinancing to take advantage of lower mortgage rates and accumulated equity, modifying the terms of the existing mortgage or selling. The CARES Act also placed a moratorium on all foreclosures until August 31.
The CARES Act covers only homes that are owned or insured by the federal government. These include Fannie Mae, Freddie Mac, Ginnie Mae, FHA, USDA and V.A., and account for about 70 percent of all mortgages. Lenders or investors own the other 30 percent. The government asked that owners of these privately owned mortgages create forbearance programs for the borrowers.
For obvious reasons, forbearances mandated by the CARES Act have not been popular among lenders. Under pressure from the government, most private lenders have agreed to forbearances, but for shorter periods and with no commitment to extend them. To reduce the perceived risk in their portfolios, they took steps to reduce exposure to risk by quietly raising loan limits on new loans. Most private lenders who recently began offering the low-down-payment business halted their programs and lowered the standard for load-to-value ratios.
So far, so good
To date, the forbearance programs under the CARE Act are working, but the hard part is yet to come.
Some borrowers are voluntarily leaving forbearance months early, and applications for forbearance have steadily declined. About 7 percent of U.S. mortgages were in forbearance in the first week of August, down from 9 percent in May, and one month or more before the six months when the first mortgage forbearances expire.
Instead of increasing, mortgage defaults have declined, a sign that the forbearance program is keeping foreclosures down, which is a primary objective of the CARES Act. CoreLogic reported that in April, early-stage delinquencies reached their highest level in 21 years. Still, loans in forbearance are counted as delinquent, and the rise in early delinquencies reflected mortgages going into forbearance under the CARES Act.
Strong prices have pushed up home equity through the second quarter, reducing the number of underwater mortgages and increasing the number of equity-rich mortgages — those with combined loan-to-value ratios of 50% or less — from 14.5 million to 15.2 million over the past year.
Half a million foreclosures?
In late July, the data analytics firm Attom Data Solutions made a remarkable and sobering forecast.
"Amid projections that high unemployment connected to the pandemic will worsen, an analysis by ATTOM Data Solutions shows that anywhere from about 225,000 to 500,000 homeowners across the country could face possible foreclosure throughout the rest of 2021 because of delinquent loan payments."
Though large enough to rattle housing markets, even ATTOM's worst predictions are milder than when 4 to 6 million homes foreclosed upon from 2008 through late 2011.
ATTOM's worst-case scenario has foreclosures reaching 500,000 next year
Another analysis by Fitch Ratings, which rates mortgage-backed securities, argues that homeowners today have a cushion of equity to protect them from foreclosure that they lacked at the outbreak of the Great Recession.
"As of April 30, nearly 80 percent of mortgage borrowers in forbearance had at least 20 percent equity in their homes, according to Black Knight, providing a buffer against financial hardship or job loss and an incentive to continue to make payments following forbearance. Only 10 percent of the number of loans in forbearance had a combined LTV of 90 percent or higher, taking into account post-loan origination home price growth and any second-lien debt."
Sooner or later, the piper must be paid
With so many unknowns, even forecasts for the third and fourth quarters of this year are problematic.
America has failed to bring the COVID-19 crisis under control. We have made progress containing the virus only through lockdowns, which devastated the economy. Real relief awaits finding a successful vaccine and vaccinating enough people to stop the spread. That's probably 9 to 12 months away,
During the pandemic, the U.S. economy has declined faster than at any time since the Great Depression. Housing markets have yet to feel the full impact of unemployment and underemployment. Artificially low inventories and demand is driven by the coming of age of the largest and third-largest generations in history have kept prices rising―for now.
Forbearances and the moratorium on defaults are giving homeowners some breathing room to weather the current crisis, but they are delaying, not solving the problem. Small businesses and unemployed people still in crisis. Over time, forbearances could seriously damage our housing finance industry.
Beginning in August, when the first forbearances under the CARES Act expire, large numbers of homeowners will start to pay their monthly mortgages again plus, at some point, the payments they missed. The piper must be paid.
To add to the uncertainty, we are three months away from a presidential and congressional election whose outcome could lead to a complete change in national pandemic, economic, and housing policies.
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