There Probably Won’t Be A Post-Covid Wave of Foreclosures. Here’s Why.
By Shaina Mishkin
March 2, 2021, 3:30 pm EST
Foreclosure moratoriums are set to expire at the end of June. Biden has proposed extending them through September.
When Joe Biden became president, he inherited a nation rife with problems stemming from the Covid-19 pandemic. Among his priorities: Ensuring the 2.1 million homeowners seriously behind on their mortgage payments don’t lose their homes and spur a full-on housing crisis.
The Biden administration has extended homeowner protections put in place in the immediate wake of the pandemic and has proposed extending them further. Once the policies end, there will be an uptick in foreclosures, but just how much depends on the duration of both the crisis and protections.
“There’s a morphine drip into the body economic that is so powerful that you have no idea what the underlying condition of the patient is,” William R. Emmons, an economist at the Federal Reserve of St. Louis, told Barron’s. “We have no idea what the true state of the housing market is—or would be, hypothetically—because we’ve hit it with such a huge dose of morphine.”
Agencies such as the Federal Housing Finance Agency and the U.S. Department of Housing and Urban Development extended their foreclosure moratoriums in mid-February and expanded the period in which a homeowner can receive forbearance, or a temporary break in mortgage payments. Broader stimulus measures, like direct payments to individuals, have also helped homeowners stay current and build equity, Emmons says.
Without the forbearance extensions last month, about half of all active forbearance plans were set to expire this spring, according to mortgage data company Black Knight. Economists say the host of homeowner protection programs currently in place, as well as those being considered in Biden’s proposed relief bill, will help the nation avert a foreclosure crisis on par with that of the 2008-09 financial crisis.
Homeowners have been resilient throughout the pandemic. Driven in part by high demand and low supply, home prices rose 10.4% on an annual basis in December according to the Case-Shiller national home price index—appreciation that has translated into fast equity for many homeowners. Foreclosures, meanwhile, fell to a low unseen in at least 16 years in 2020, according to housing research firm Attom Data Solutions, because of the protections in place.
Rising prices are a key reason why economists expect to avoid a foreclosure crisis on par with the one resulting from the economic downturn in the late Aughts. Distressed sales—including REO sales, short sales, and third-party foreclosure auction sales—rose to 29.6% of all home transactions in 2008, up from 13.2% in 2007, according to Attom Data Solutions. “Distressed sales will not be as [numerous] as during the Great Recession and its immediate aftermath, because home equity is at a record level and home prices, in most places, are expected to continue to rise,” said Frank Nothaft, chief economist at CoreLogic.
Homeowners also entered the pandemic on stronger footing than those in the years leading up to the financial crisis, says Jonathan Rose, a policy advisor at the Federal Reserve Bank of Chicago who specializes in U.S. economic history. “We didn’t have a housing bubble; we didn’t have a major deterioration [of] underwriting standards like in 2007, 2008,” Rose said. Plus, aid came swiftly for homeowners this time around.
Though positive equity may keep homeowners out of foreclosure, those who remain unemployed once protections end may ultimately need to sell their homes. “We do not have any estimates of how many of these ‘forced sales’ may occur, but undoubtedly there will be some,” CoreLogic’s Nothaft said.
The homeowners most at risk of foreclosure are those without income or substantial equity in their homes. For these buyers, remaining in a forbearance plan may open them up to foreclosure, says Mike Fratantoni, chief economist at the Mortgage Bankers Association. “Once you add these missed payments to the loan balance—particularly if it was a borrower that made a relatively small down payment—it becomes more and more likely that they really are beginning to erode the equity of their home,” Fratantoni said.
The volume of foreclosures will depend on the progress of the economic recovery when policies expire, said Emmons. The FHFA and HUD foreclosure moratoriums are set to expire at the end of June; Biden has proposed extending the ban through September. Should the protections outlast the crisis, foreclosures will likely not have a big effect on the economy. But, if the crisis outlasts homeowner protections, foreclosures could rise in regions hit hardest by unemployment.
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