A Flood of Borrowers Will Exit Forbearance This Year: What Lenders Should Know
As of May 11, over 2 million homeowners remain in forbearance plans related to COVID-19, according to Black Knight data. The good news: Forbearance volume has declined steadily over the month across all types of loan plans.
But even as forbearance exits accelerate, serious questions remain: What will happen when forbearance programs created under the CARES Act expire? Will lackluster job growth in April hurt homeowners’ abilities to stay in their homes?
“The opening of the economy, as the successful vaccination effort continues, should lead to further reductions in the forbearance share,” said MBA Senior Vice President and Chief Economist Mike Fratantoni. “However, many homeowners continue to struggle.”
Out of current forbearance plans, more than half have been in effect for over a year. Today, 2.5% of GSE loans, 7.3% of FHA/VA loans, and 4.6% of portfolio/PLS loans remain in forbearance. Around 250,000 of those plans will expire this month, with another 860,000 slated for review for extension or removal in June. Meanwhile, 4.1 million Americans have been unemployed for 27 weeks or longer.
At some point, as the economy recovers, forbearance programs and unemployment benefits will come to an end. What will happen to borrowers and the housing market?
Borrower options
At the end of forbearance, borrowers have three options:
—Option #1: Become current on loan payments.
—Option #2: Negotiate a modification to the loan. This could mean intermittent payments, lengthening the loan term, or deferring payments until selling, refinancing, or the end of the loan term.
—Option #3: Sell the house.
Many borrowers may find option #1 difficult. Job growth hasn’t been as strong as some estimates predicted. In February of this year, for instance, there were around 9.5 million fewer jobs than February of 2020.
Option #2, loan modification, will be more attractive to most homeowners. The CARES Act offers generous terms for borrowers. Homeowners have been able to defer payments for a year or more, and those payments aren’t necessarily due when forbearance ends. This is a dramatic departure from terms offered during the Great Recession.
Option #3 may seem unlikely for many borrowers. Due to sky-high home prices and low inventory, homeowners have reason to hold onto their houses right now.
Still, selling a home, pocketing the money, and either buying a cheaper property (given, that prospect may be hard in today’s market) or moving into a rental is a much better option than foreclosure. In fact, steeply rising home values could provide a life raft for suffering borrowers and a saving grace for the housing market.
A market correction, not a crash
A lack of inventory and historically high home prices differentiate the end of forbearance from the aftermath of the Great Recession.
In the years following 2008, many homeowners found themselves underwater, i.e. they owed more on their homes than those homes were worth. That scenario is much less likely in today’s market since most borrowers have enjoyed significant appreciation over the pandemic.
About 3% of homeowners currently owe more than their home is worth, according to the Urban Institute’s data. That’s compared to 30% during the Great Recession.
The major reasons for that appreciation are low inventory and high demand, which have driven up home prices dramatically.
“Right now, we’re at very low housing inventory rates, just a record low,” said Mortgage Bankers Association (MBA) VP of Industry Analysis Marina Walsh. “There’s just not enough housing out there for the demand, which is a big, big change from the Great Recession.”
Another difference from the Great Recession is that American homeowners today have much more equity in their homes. Total home equity increased by $1.5 trillion in Q4 2020, up 16.2% from a year earlier, for an average gain per homeowner of $26,300, according to CoreLogic.
The conditions driving housing now likely won’t lead to a crash. Still, millions of homeowners are behind on their payments and struggling to find jobs. So, what do economist predict will happen through 2021 and into 2022?
Fallout at the end of forbearance
By this fall, the CFPB anticipates a flood of homeowners leaving forbearance. That’s why CFPB Acting Director Dave Uejio issued several announcements warning servicers to set up homeowners for success. In particular, Uejio hopes to prevent as many foreclosures as possible.
In fact, the CFPB has proposed a new rule that would essentially prevent servicers from starting the foreclosure process until after December 31, 2021.
“Emergency protections for homeowners will start to expire later this year and by the fall, a flood of borrowers will need assistance from their servicers,” said Uejio. “The CFPB is proposing changes to the mortgage servicing rules that will ensure servicers and borrowers have the tools and time to work together to prevent avoidable foreclosures, which disrupt lives, uproot children and inflict further costs on those least able to bear them.”
The idea with the foreclosure moratorium is to give the millions of Americans who will run out of their forbearance periods towards the end of the year a chance to consider their options. As a result, many homeowners will be exploring loan modification or looking at selling their homes and moving on.
“We are at really an unusual point in history,” said Diane Thompson, a senior adviser at the CFPB.
“I don’t think anybody has ever before seen this many mortgages in forbearance at one time that are expected to exit at one time.”
What can lenders expect in the market?
The future is uncertain, but economists agree that a crash anywhere near 2008’s housing crisis is unlikely. Still, millions of homeowners will undoubtedly face hardship as forbearance programs end. And while foreclosures won’t happen for the time being, that won’t last forever.
During 2021’s changing market, lenders can focus on a few areas to protect both their businesses and struggling homeowners:
—Pay attention to CFPB communications and rules. As borrowers exit forbearance in unprecedented numbers, the CFPB will keep a close eye on how lenders and servicers treat those homeowners.
—Be proactive in working with homeowners. Lender should make a plan now to equip borrowers with the resources and support they need to avoid foreclosure.
—Keep an eye on capital markets. Loans currently in forbearance may receive a partial claim and enter RG pools, a new concept introduced by Ginnie Mae back in July. Other loans might be modified or receive other loss mitigation treatment. These changes will present challenges to servicers. Mortgage professionals should watch closely to see how these pools perform and what longterm plans for handling them will be.
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