When Forbearance Plans end, will Foreclosures increase?

Forbearance to foreclosure

When Covid caused hardships for homeowners, the government put into place forbearance plans to avoid a surge in foreclosures.  Homeowners were able to stay in their homes without making their monthly mortgage payments.  Today, almost three million households are actively in a forbearance plan.  If these homeowners are not able to catch up after their forbearance program ends, the question becomes, “What happens next?”  More foreclosures?  A crash in home values?

Rest assured, there are several differences in today’s situation than the 2006-2008 housing crisis.  The major difference being homeowners have tremendous amounts of equity in their homes.

Let’s Checkin with the Industry Experts

Over the last 30 days, several industry experts have weighed in on this subject.

Odeta Kushi, Deputy Chief Economist at First American:

“The foreclosure process is based on two steps. First, the homeowner suffers an adverse economic shock…leading to the homeowner becoming delinquent on their mortgage. However, delinquency by itself is not enough to send a mortgage into foreclosure. With enough equity, a homeowner has the option of selling their home, or tapping into their equity through a refinance, to help weather the economic shock. It is a lack of sufficient equity, the second component of the dual trigger, that causes a serious delinquency to become a foreclosure.”

Don Layton, Senior Industry Fellow at the Joint Center for Housing Studies of Harvard University:

“With a greater cushion of equity, troubled homeowners have dramatically improved options: a greater ability to access funding (e.g. home equity lines) to keep paying monthly expenses until family finances might recover, improved ability to qualify for and support a loan modification, and, if push comes to shove, the ability to sell the home and monetize their increased net worth while reducing monthly payment obligations. So, what should lenders and servicers expect: a large number of foreclosures or only a modest increase? I believe the latter.”

Forbearance to foreclosure

How Forbearance will affect housing prices in Summerville

Yes, there will be more homes coming on the market when the forbearance plans end.  Several things to note:

  • Homeowners will put their homes on the market expecting (and getting) the equity out of their homes.
  • Homes will not be coming on the market as “distressed sales,” meaning foreclosures or short sales
  • Currently, we have a significant shortage of homes on the market.  Compared to a year ago, the number of homes on the market is down 50%.

Bottom Line

Yes, we may see a small spike in foreclosures as forbearance plans end.  But the real news is we don’t expect them to impact the housing values. I anticipate an average 4-5% appreciation of home values this year in Summerville.   The pandemic has led to both personal and economic hardships for many Summerville households but our overall real estate market has weathered the storm and will continue to do so in 2021.

 

Check out the blog on home equity increase projections for the next five years here.  It was written at the end of 2019 and we’re right on track even with the pandemic.