As loan forbearance plans continue to inch closer to their expiration dates, there is widespread concern that the housing market will undergo a repeat of the catastrophic collapse of the 2008 housing bubble that led to an overwhelming number of foreclosures. The good news is that the data suggests such a nightmare scenario is highly unlikely. Here’s a breakdown of why you should be confident there is no title wave of foreclosures looming on the horizon.
FINANCIALLY STABLE HOMEOWNER BASE
In the aftermath of the 2008 housing crisis, nearly 9.3 million families lost their primary residence via short sale, foreclosure, or bank repossession of the property. With the advent of mandatory stay-at-home orders starting in March 2020, there was a high degree of concern that the COVID-19 pandemic would have an extremely negative impact on the collective housing industry. At the time, several respected industry experts estimated that somewhere in the neighborhood of 30% of all mortgage holders would be forced into forbearance. Fortunately, their projections were wrong—as only 8.5% of mortgage holders entered the forbearance process and that number has now decreased to only 3.5%. The current number of mortgages in forbearance is approximately 1.86 million, still a significant amount, but nowhere close to the forecasted 9.3 million or so that experts originally thought.
EXISTING FORBEARANCES HAVE EQUITY
An analysis of the 1.86 million loans presently in forbearance protocol reveals that more than 87% of borrowers have established at least 10% equity in their properties. This 10% threshold mark is significant in that it is sufficient equity to allow the homeowner to sell their homes and cover the associated costs as opposed to taking a major hit on their credit scores that is the inevitable end-result of a foreclosure or short sale proceeding. With regards to the other 13% who have not built up sufficient equity to re-sell their homes, if all of them went into foreclosure (not likely) it would result in almost 242,000 mortgages defaults. To provide some context for that potential scenario, consider the foreclosure totals for the three years preceding the onset of the pandemic:
–2017: 314,220 foreclosures
–2018: 279,040 foreclosures
–2019: 277,520 foreclosures
Certain markets could feel an effect. However, nationally it is unlikely that it would create a devastation.
FAVORABLE MARKET CONDITIONS
During the market collapse nearly 15 years ago, foreclosed properties were being added to a market that was already saturated with a substantial surplus of available properties. That is definitely not the case with the current housing market. There was a 9-month supply of homes for sale in 2008—compared to the 3-month supply in the present market. Industry experts at the National Association of Realtors (NAR) are confident that any influx of foreclosed properties will be readily absorbed by the current market and are unlikely to result in any pricing decreases.
CONTINUED GOVERNMENTAL INTERVENTION
The Biden administration recently released an informational memo to the public outlining the manner in which homeowners holding government-backed mortgages will be provided with additional options to allow them to remain in their homes as they exit forbearance. Notably, the memo claimed that borrowers who are able to resume making their pre-pandemic monthly mortgage payment installments, government agencies will require lenders to provide options that enable borrowers to tack on any missed installments to the end of the loan with no financial penalty. Additionally, With new initiatives taken by the Department of Housing and Urban Development (HUD), Department of Agriculture (USDA), and Department of Veterans Affairs (VA), the government is aiming to offer homeowners a nearly 25% reduction in their monthly principal and interest payments to make sure they have adequate funds to stay in their homes and continue to build long-term equity.
TAKEAWAY
Real estate investors should continue to see stability in the housing market. It is unlikely that we would see a repeat of 2008.
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