Forbearance, foreclosures, and the dangers facing homeowners
The economic peril from COVID-19 has reached nearly every corner of the economy, and the threat of housing insecurity looms ominously on the horizon for millions of Americans. Today we want to focus on the plight of the homeowner, just 12 years removed from the unprecedented 2008 Housing Crisis.
In the near-term, temporary measures like stimulus checks, an increase to unemployment insurance, and forgivable small business loans to cover payroll amounted to hundreds of billions of dollars injected directly into the bank accounts of homeowners. For those who lost some or all their income because of COVID-19, these temporary measures provided a lifeline through the spring and summer to continue making mortgage payments. And at the height of the pandemic, many courthouses, where foreclosure notices are be filed, were closed, effectively freezing foreclosure activity entirely. Additionally, on March 18, the Federal Housing Finance Agency (FHFA) enacted a moratorium on foreclosures for borrowers with mortgages backed by Government Sponsored Enterprises (GSE) Fannie Mae and Freddie Mac that has subsequently been extended through the end of 2020, protecting 28 million single-family homeowners. FHFA also allows these borrowers the right to request forbearance for a total of 360 days.
So what is forbearance? It’s when a lender allows a borrower to suspend or reduce the mortgage payment for a limited period during a time of financial hardship. Importantly, forbearance is not forgiveness. The payments need to be made eventually, but they can be paused entirely for two 180-day periods. Even though the CARES Act only applies to GSE-backed loans, they make up such a significant portion of the lending market that it effectively drove many lenders to adopt similar protections.
According to a weekly survey conducted by the Mortgage Bankers Association (MBA), only 0.25% of loans were in forbearance in January of this year. In April, a just month after the CARES Act, that number surpassed 8%, and by June it topped off at 8.6%. By the end of August, it ticked slightly downward to 7.6% as some homeowners chose to exit forbearance early and others opted not to renew a second 180-day window. According to the Atlanta Federal Reserve, “the beefed-up unemployment benefits have kept forbearance rates lower than some of the most pessimistic forecasts of 20% to 30%.”
While forbearance undoubtedly offers homeowners protections, it’s not a fail-safe tool that will ensure housing stability. First and foremost, borrowers are required to proactively reach out to their lenders to request forbearance, and that process is not necessarily straightforward. According to a survey of the websites of the top 30 loan servicers by the Inspector General of HUD, nearly half did not offer information on the duration of the initial forbearance period, and a third made no mention of the forbearance option whatsoever. Uncertainty around how and Reports of long wait times on customer support lines could have potentially dissuaded interested borrowers. And according to a survey by the property platform Avail, 50% of small-scale landlords don’t even know if they qualify for forbearance.
And for those that do enter forbearance, uncertainty awaits on the other side. There are a range of repayment options, the harshest being a one-time ‘lump-sum’ payment of accrued principal, interest, taxes, and HOA fees over the deferred term. If the primary breadwinner loses her job due to COVID, she will not have the resources to put aside Even the more lenient repayment options—increased monthly payments to gradually repay what is owed or deferral, in which the term of the loan is extended for the length of time it was in forbearance—might not be tenable to a household that remains on the financial brink after the 360-day window expires.
According to a policy brief from the Urban Institute, some 530,000 borrowers were newly delinquent on their loans after COVID hit in spite of qualifying for forbearance. A survey of housing counselors revealed that nearly 70% of homeowners were fearful of lump-sum payments, and over 50% were not aware of the forbearance option.
Some industry experts estimate that up to 15% of borrowers that enter forbearance will still wind up in default. In a potential forecast of what’s to come in 2021, over 200,000 homes that exited forbearance after the initial 180-day window fell delinquent shortly thereafter. Attom Data forecasts that residential foreclosure activity could double next year, nearing 500,000 homes at risk of foreclosure by early 2021. While still lower than the peak that followed in the wake of the previous Foreclosure Crisis, when close to a million homes were in the foreclosure process, this represents a significant risk not only to the impacted homeowners, but also to communities as a whole.