Manage episode 290876554 series 2394432
The prediction that millions of homeowners would face foreclosure due to job losses from COVID 19 shutdowns does not seem to be materializing. There are some who say that delinquent borrowers have a way to avoid that fate this time around. Unlike the Great Recession, they have a lot more equity in their homes which they won’t want to lose.
When the housing market crashed in 2008, it was the result of easy lending. Home loans were easy to get, often with no down payment or verification of income. In some cases, buyers would get money back for buying a home, or qualify with a teaser rate, not the real rate. That, of course, drove prices up and created a housing bubble. The bubble burst when those loans eventually came due and people couldn't afford the payment. Seems like an obvious problem, doesn't it?
As more and more loans reset, more people went into foreclosure, flooding the market with distressed inventory far below market value. Anyone who wanted to sell their home at market value had to compete against bank owned properties that were much cheaper. Thus, the air came out of the bubble.
As home values dropped nationwide, even those who could afford to own their home couldn't sell it for what it was worth if they needed to. They owed more than what the property was worth, which they called being "underwater" or upside down on their mortgage. With no home equity in the deal, it made sense to walk away, which many people did. They had nothing to lose except their good credit, and some didn't even have that.
That is unlikely to happen this time around, at least to that extent, for one simple reason: Homeowners have much greater equity in their homes. And many of those homeowners also have great credit. According to Realtor.com, only 3% of homeowners are underwater, owing more than the home is worth. During the Great Recession, about 30% of homes were underwater or close to it.
So even if homeowners have not recovered financially from the pandemic, they have a way to get out of mortgage debt that’s a lot easier than foreclosure -- by selling their homes to pay off their loans. Many will also see a hefty profit.
And it won’t be difficult to sell those homes because of the inventory crunch. Vice President of the Mortgage Bankers Association, Marina Walsh, told Realtor.com: “There’s just not enough housing out there for the demand, which is a big, big change from the Great Recession.”
That doesn’t mean that at-risk homeowners don’t face a tough road ahead, especially those in less desirable markets. Realtor.com mentions places in the Rust Belt or hurricane-prone communities in Louisiana, for example.
Currently, the federal foreclosure moratorium for government-backed loans is June 30th. Even without forbearance, many homeowners have protection until then. For those in forbearance programs, they are protected for as long as 18 months.
According to Black Knight, 4.4% of borrowers were in forbearance as of April 13th. That number has been decreasing steadily because the economy has been improving and people are getting jobs. But that’s still a high number of people in forbearance, putting all those homeowners at risk.
In addition to that, 5% of borrowers are either seriously delinquent or have already entered the foreclosure process. That means they haven’t paid their mortgage for at least three months. And that number is higher than it was during the last foreclosure crisis, according to a report from the Urban institute.
Urban Institute researcher, Jung Hyun Choi, says that even with those high numbers, she doesn’t think we’ll see another foreclosure crisis because of high home values. She says: “They have the option to sell the properties and move to a more affordable unit. Or in the worst-case scenario, they’ll have to switch to rental housing.”
What she’s saying is that we probably won’t see a foreclosure crisis, but if all those homeowners sell their homes and can’t buy smaller, less expensive ones, they will become renters.
ATTOM Data Solutions has done some research on the metros with the highest number of homeowners who are, in fact, underwater. ATTOM defines “seriously underwater” as owing at least 25% more than the home is worth. Those metros include Baton Rouge, Louisiana; Syracuse, New York; Scranton, Pennsylvania; New Orleans; Virginia Beach; and several cities in Ohio, including Cleveland. The percentage of underwater loans in those cities range from about 9% to more than 14%.
In cities with strong job markets and highly-paid workers, like San Jose, Salt Lake City, San Francisco, and Seattle, the share of underwater loans is less than 2%.
It's also important to remember that banks learned their lesson in 2009, that flooding the market with REO's, or bank owned properties, is not good for the bank's books. It's more likely that banks will try to work out a loan modification, since in many cases, it wasn't the borrowers fault that jobs were lost in the first place. It's more likely banks will just add those missed payments to the back of the loan, rather than flood the market with distressed inventory.
Those who do end up having to sell their homes will likely become renters, which could exacerbate an already tight rental market and drive rents even higher.
You’ll find links to the Realtor.com story on the podcast player page for this podcast at www.NewsForInvestors.com.