You may have seen an article, or heard on the news recently, that the mortgage forbearance programs that went into effect at the height of the pandemic lockdowns are coming to an end. When these programs were introduced, dire predictions were made by some that these forbearances would just be the tip of the iceberg and massive foreclosures and a housing crisis similar to what we saw 15 years ago would follow.

The truth is, that’s just not the case. While it is true the forbearance programs are ending, here are 4 reasons why their ending will not lead to a wave of foreclosures or a housing crisis.

1) There are fewer homeowners in trouble compared to 2008

Following the housing market crash in 2008, approximately 9.3 million homeowners lost their homes to foreclosure, short sale, or deed in lieu (voluntarily signing their home over to the bank).

When the stay-at-home orders were issued last year, there were reports and predictions by some housing experts that up to 30% of all mortgage holders would end up in forbearance and a large number of those would probably end up in foreclosure. That is where the idea of a future foreclosure wave and housing market crash came from.

In actual fact, only 8.5% of mortgages ended up in a forbearance program and, as of last week, only 3.5% remain in the program. A far cry from the 30% that was projected.

Putting those percentages into numbers, 1,863,000 mortgages are still in forbearance. While that is a large number, it’s nowhere near 9.3 million.

2. Most of the 1.86M in forbearance have enough equity to sell their home

Of those 1.86 million mortgages still in forbearance, 87% have at least 10% equity. The 10% equity is an important number because it represents enough equity for the home to be sold traditionally, pay off the mortgage, cover all expenses related to the sale, and have money left to move to a rental property.

The remaining 13% of households might not have an option to sell. In a worst-case scenario, if all 13% of those 1.86 million homes were foreclosed on, that would be 241,800 homes. While that sounds like a lot of homes, keep in mind foreclosures happen every year in every type of market. good and bad. Here are the annual foreclosure numbers for the three years prior to the pandemic:

• 2017: 314,220

• 2018: 279,040

• 2019: 277,520

As you can see, the maximum expected number of foreclosures (241,800) that could come out of current forbearance programs is less than we saw in each of the three years prior to the pandemic.

3. The current housing market can absorb all listings from foreclosures

One of the biggest differences between 2008 and today has to do with the amount of existing supply in the market. When foreclosures starting hitting the market in 2008 there was a nine-month supply of homes for sale nationally. (Six months supply is considered a balanced market). Inventory is currently just under three months nationally and under one month here in Frisco and Prosper TX, and right at one month in Temecula, CA. Any foreclosure properties that do make it to market, will be coming onto a market that's starving for inventory.

As Lawrence Yun, Chief Economist at the National Association of Realtors (NAR) explained when addressing potential foreclosures emerging from the forbearance program:

“Any foreclosure increases will likely be quickly absorbed by the market. It will not lead to any price declines”

4. Those in power will do whatever is necessary to prevent a wave of foreclosures

Going back to the previous housing crash, after the initial waves of foreclosures hit the market, you started to see more short sales emerge. Neither the government, banks, or mortgage industry want to see another foreclosure crisis. None of these entities are in the business of owning homes. Foreclosures are expensive, time-consuming, bad for neighborhoods, and create liability for the parties involved. Banks are in the business of lending money, not owning homes. Short sales rose in popularity because they allowed properties to be transferred from the seller to a new owner without the bank ever having to foreclose or take ownership. Less liability and less costly. The government will do whatever it can to prevent as many new foreclosures as possible.

Last week, the White House released new guidelines explaining how homeowners with government-backed mortgages (Fannie Mae, Freddie Mac, FHA, VA, etc.) will be given further options to keep their homes when exiting forbearance. Here are two examples:

“For homeowners who can resume their pre-pandemic monthly mortgage payment and where agencies have the authority, agencies will continue requiring mortgage servicers to offer options that allow borrowers to move missed payments to the end of the mortgage at no additional cost to the borrower.”

“The new steps the Department of Housing and Urban Development (HUD), Department of Agriculture (USDA), and Department of Veterans Affairs (VA) are announcing will aim to provide homeowners with a roughly 25% reduction in borrowers’ monthly principal and interest (P&I) payments to ensure they can afford to remain in their homes and build equity long-term. This brings options for homeowners with mortgages backed by HUD, USDA, and VA closer in alignment with options for homeowners with mortgages backed by Fannie Mae and Freddie Mac.”

When you look at the numbers and compare what is happening today to 2008, it’s clear that conditions are vastly different and there won’t be a flood of foreclosure or distressed properties coming to the market.

As Ivy Zelman, founder of the housing analytical firm Zelman & Associates said:

The likelihood of us having a foreclosure crisis again is about zero percent

Bottom LIne

If you’ve been waiting for the market to turn and hoping new foreclosures and distressed properties would cause prices to come down, you may find yourself out of the market for longer than expected. Schedule a Call and let’s talk about whether now is a good time for you to consider buying or selling a home.