Why Today’s Options Will Save Homeowners from Foreclosure
Many housing experts originally voiced concern that the mortgage forbearance program (which allows families impacted financially by COVID to delay mortgage payments to a later date) could lead to an increase in foreclosures when forbearances end. Some originally forecasted that up to 30% of homeowners would choose to enter forbearance. Less than 10% actually did, and that percentage has been dropping steadily. Black Knight recently reported that the national forbearance rate has decreased to 5.6%, with active forbearances falling below 3 million for the first time since mid-April. Many of those still in forbearance are actually making timely payments. Christopher Maloney of Bloomberg Wealth recently explained:
“Almost one quarter of all homeowners who have demanded forbearance are still current on their mortgages…according to the latest MBA data.”
However, since over two million homeowners are still in forbearance, some experts are concerned that this might lead to another wave of foreclosures like we saw a little over a decade ago during the Great Recession. Here is why this time is different.
There Will Be Very Few Strategic Defaults
During the housing crash twelve years ago, many homeowners owned a house that was worth less than the mortgage they had on that home (called negative equity or being underwater). Many decided they would just stop making their payments and walk away from the house, which then resulted in the bank foreclosing on the property. These foreclosures were known as strategic defaults.
Today, the vast majority of homeowners have significant equity in their homes. This dramatically decreases the possibility of strategic defaults. Aspen Grove Solutions addressed the issue in a study titled Creating Positive Forbearance Outcomes:
“Unlike in 2008, strategic defaults have not emerged as a serious problem and seems unlikely to emerge given stronger expectations for property price increases, a record low inventory of homes, and stable residential underwriting standards leading up to the crisis which has reduced the number of owners who are underwater.”
There Are Other Options That Were Not Available the Last Time
A decade ago, there wasn’t a forbearance option, and most banks did not put in other programs, like modifications and short sales, until very late in the crisis. Today, homeowners have several options because banks understand the three fundamental differences in today’s real estate market compared to 2008:
- Most homeowners have substantial equity in their homes.
- The real estate market has a shortage of listings for sale.
- Prices are appreciating (vs. depreciating in 2008).
Aspen Grove outlined several potential solutions that keep homeowners in their homes:
- Refinance Repay – capitalize the forbearance amount (best for borrowers with good credit, equity, and stable employment).
- Repayment Plan – pay back missed amounts via higher monthly payments (for those with increased monthly income but insufficient savings).
- Deferral Program – shift missed payments to the end of the loan term (for those who regained most income but cannot refinance).
- Modification / Flex Mod – permanent loan modifications for households with a significant, lasting income reduction.
Each of these programs enables many homeowners to remain in their homes instead of facing foreclosure.
What About Those Who Don’t Qualify?
Homeowners who can’t catch up on past payments and don’t qualify for the programs above have two options: sell the house or let it go to foreclosure. Some experts think many will be forced into foreclosure. But the data suggests otherwise.
In 2008, many homeowners had very little equity, so selling was not a viable option. Today, most homeowners have sizable equity and will likely choose to sell and keep their equity rather than wait for a foreclosure. Black Knight noted in a recent report:
“In total, an estimated 172K loans are in forbearance, have missed three or more payments under their plans and have less than 10% equity in their homes.”
In other words, among the millions in forbearance, only a small fraction are at high risk of foreclosure due to low equity.
Bottom Line
Some analysts project future foreclosures in the hundreds of thousands to over a million. Given the options available today—widespread forbearance, modification programs, large homeowner equity, and a tight resale market—that outcome looks unlikely for most homeowners.
