While the COVID-19 pandemic has rocked the economy, the housing market has defied all predictions by remaining strong. Unlike the last financial crisis, home prices are soaring to new heights, there isn’t a vacant home in sight, and few struggling homeowners have lost their homes to foreclosures.
At the start of the pandemic, the federal government staved off a potential foreclosure crisis by allowing many homeowners who could no longer make their mortgage payments to enter a forbearance period. About 2.5 million homeowners were still in forbearance at the end of March this year, according to the Mortgage Bankers Association. These homeowners, most of whom lost jobs or hours due to the pandemic, were permitted to pause paying their loans every month until their forbearance period ends as they try to get back on their feet.
Now the concern is what will happen when this temporary clemency period winds down while many are still struggling financially. Homeowners with federally backed loans could receive up to 18 months of forbearance, so those who took it early on in the pandemic could see those protections end after September. That could put roughly 1.7 million homeowners at risk of losing their homes, according to the Consumer Financial Protection Bureau.
Does this mean the nation is headed for another foreclosure crisis that will force millions from their homes and leave behind a slew of vacant properties in its wake? Not likely, housing experts say. Ironically enough, the high home prices and competitive housing market that have tormented buyers may be exactly what will prevent a repeat of what happened during the Great Recession.
With home prices reaching new highs, few homeowners today owe more on their homes than their properties are worth. Plus, the nation is in the throes of a historic housing shortage, so any homes that go on the market are likely to be snapped up quickly. So if homeowners can’t make their mortgage payments, they can take another path, one far less painful than foreclosure: sell, often at a hefty profit. President Joe Biden may also continue to extend the forbearance period.
“Right now, we’re at very low housing inventory rates, just a record low,” says Marina Walsh, vice president of industry analysis at the Mortgage Bankers Association. That means homes are selling quick, often for well over the asking price as buyers compete over them. “There’s just not enough housing out there for the demand, which is a big, big change from the Great Recession.”
But that does’t mean that financially squeezed homeowners are out of the danger zone yet—even if they don’t go through foreclosures. The percentage of homeowners who are seriously behind on mortgage payments or in foreclosure was an astonishing 245% higher in February 2021 than it was in February 2020, according to the data firm Black Knight.
The areas with the most homeowners at risk tend to be places with lower home values, where sellers couldn’t fetch as much for their properties. Many of these places are in the Rust Belt, where weaker economies and fewer good-paying jobs have lessened the demand for homes and the ability of buyers to offer higher prices, and hurricane-prone communities in Louisiana, according to ATTOM Data Solutions, a real estate information firm.
“There is a tidal wave of distressed homeowners who will need help,” said Dave Uejio, the acting director of the Consumer Financial Protection Bureau, in a statement earlier this month.
Forbearance rates are steadily dropping, but many homeowners are seriously behind on payments
To stave off another rush of foreclosures, the federal Coronavirus Aid, Relief, and Economic Security Act prohibited foreclosures of federally backed home mortgages in most circumstances. Government-backed loans make up about half of all residential mortgages. That moratorium has since been extended to June 30.
The law also allowed homeowners with federally backed loans to be in forbearance for an unprecedented length of time if approved by their lenders. Prior to this crisis, homeowners might be able to get forbearance for a few months, usually after some sort of natural disaster. Now, there are some homeowners who may get forbearance for an entire 18 months, from March 2020 to September 2021.
But make no mistake: Homeowners will eventually have to make payments again.
“We can’t have indefinite forbearance, and we can’t have an indefinite foreclosure moratorium,” says Walsh of the Mortgage Bankers Association. “As things get back to some sense of normal, people have to move on.”
As of April 13, 4.4% of all homeowners with a mortgage were in forbearance, according to Black Knight. That percentage has been ticking down steadily as the economy improves. Still, there’s never been so many projected homeowners leaving forbearance at one time, which is why the CFPB warned mortgage companies on April 1 that they must be prepared to handle an influx of calls from homeowners in financial distress this fall.
“Millions of families are at risk of losing their homes to foreclosure in the coming months, even as the country opens back up,” warned CFPB’s Uejio in a statement.
Almost 5 million homes were in forbearance at the height of the crisis in May, around double the current rate, according to Black Knight. Many homeowners found that their financial situation was not as bad as they feared at the start of the pandemic, so they were able to leave forbearance.
“Those who are remaining are those who are more financially struggling,” says Jung Hyun Choi, a senior research associate with the Urban Institute’s Housing Finance Policy Center.