Millions of people have lost their jobs as a result of the COVID-19 recession, and homeowners have been offered a lifeline in the form of forbearance programs that allow them to press “pause” on their mortgage payments. With an estimated 2.7 million mortgages in forbearance nationally, there have been concerns that when the forbearance period ends, we may see a surge of foreclosures flooding the market. However, there are no signs that foreclosures will be a big problem in the housing market in 2021.
What is the forbearance program?
In March 2020, Congress passed the Coronavirus Aid, Relief and Economic Security Act, which included assistance for homeowners struggling to pay their mortgages. The law allowed borrowers to defer mortgage payments for up to year if they had a loan held by Fannie Mae or Freddie Mac or issued by the Federal Housing Administration, U.S. Department of Agriculture, or the U.S. Department of Veterans Affairs.
The process to request a mortgage forbearance was easy. Borrowers simply had to contact their lender and ask, with no requirement to explain how COVID-19 had impacted their income or to demonstrate that they were unable to pay their mortgage.
According to the Mortgage Bankers Association, at the end of January, an estimated 2.7 million homeowners were in a forbearance program, accounting for 5.4% of all mortgages.
Why are people worried about foreclosures?
Borrowers can request mortgage forbearance for up to a year. At the end of the forbearance period, the homeowner will have to resume mortgage payments. Depending on the agreement worked out with their lender, the missed payments will be made up either by tacking on time at the end of the mortgage term or increasing the remaining monthly payment amounts.
Most homeowners currently in a forbearance program will have to resume mortgage payments at some point in 2021. If homeowners are still facing financial hardship, it would be difficult for them to begin making payments. Data from the Mortgage Bankers Association suggests that about 13% of homeowners exiting a forbearance program have no plan in place for being able to resume making payments.
Pointing to these trends, and the fact that the mortgage delinquency rate was higher in December 2020 than it was a year ago, some have speculated that we should expect an increase in foreclosure activity in 2021.
Why the end of the forbearance period will be a “non-event” in 2021
The housing market was devastated during the 2008 recession, with an unprecedented flood of foreclosures and short sales on the market, so it is easy to understand why people would be worried about a repeat during this economic downturn. However, the situation is much different this time around.
Prices have risen dramatically during the pandemic, which means that even if homeowners were unable to make their mortgage payments, it would be relatively easy to sell their home when the forbearance period ends. Homeowners experienced a record $1 trillion gain in home equity over the past year.
In addition, mortgage rates continue to hit record lows. Homeowners in a forbearance program can refinance their loan to take advantage of the lower rates and reduce their monthly payment. Before the COVID-19 pandemic, borrowers that requested a mortgage forbearance from their lender had to wait until they were current for 12 months on their existing mortgage before they could refinance. Now, however, loans backed by Fannie Mae or Freddie Mac can be refinanced after only three consecutive on-time payments.
Finally, there is a lot of evidence to suggest that many homeowners in a forbearance program are not financially struggling but simply took advantage of the program to pause their mortgage payments. Last year, a study by LendingTree found that 70% of mortgage holders in forbearance did not need the help and could have continued to make their loan payments.
With little risk of a surge in foreclosures or short sales, REALTORS® should expect inventory to remain extremely tight in most local markets and home prices should continue to rise. The biggest risk to the housing market in 2021 is not a threat of foreclosures but rather the persistent low inventory levels that are driving affordability challenges and pushing some would-be buyers out of the market.