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Fewer Homeowners Need a Mortgage Bailout

It appears that forbearance programs won’t cause long-term problems. The number has dropped for three consecutive weeks, and 4 out of 5 owners have at least 20% equity.

NEW YORK – For the third consecutive week, the number of homeowners requiring mortgage relief dropped – a positive sign of the market’s long-term health.

As of June, 4.6 million homeowners were in forbearance, or about 8.7% of all active mortgages, according to data from Black Knight, a mortgage research firm. The numbers fell 57,000 compared to the previous week and 158,000 since May 22, the date when mortgages in forbearance peaked.

About 6.8% of all mortgages backed by Fannie Mae and Freddie Mac are in forbearance, and 12.1% of all FHA and VA loans. However, loans in forbearance held by banks or private label securities grew by an alarming 6,000 in June, according to Black Knight.

Borrowers in forbearance are eligible to delay their monthly payments for at least three months and, in some cases, up to a year.

The number of loans in forbearance represents more than $1 trillion in unpaid principal, a number that the housing market has looked at cautiously for its potential to spark a wave of foreclosures – but the strong equity positions of homeowners in forbearance is likely to prevent a foreclosure crisis.

Nearly 80% of homeowners in active forbearance have at least 20% equity in their homes, according to Black Knight’s research. That provides an extra cushion to homeowners, servicers and regulators to explore options to help avoid foreclosure and default losses for owners who are still unable to make monthly payments at the end of their forbearance period. That equity also provides an incentive for homeowners to try to work something out. During the recession, many homeowners were underwater – owing the lender more than the home was worth – which gave them another reason to walk away.

Nine percent of homeowners have 10% or less equity, which is still usually enough to cover the cost of a property sale. Only 1% of homeowners are underwater on their mortgage currently.

Despite 25% of the workforce filing for unemployment benefits, less than 9% of mortgages are currently in forbearance, Black Knight notes.

“With expanded unemployment benefits set to end on July 31, it remains to be seen what impact that may have on both forbearance requests and overall delinquencies,” Ben Graboske, Black Knight president of data and analytics, said in a statement on June 8.

Source: “Coronavirus Mortgage Bailout Shrinks Further, But Bank-Held Loans Are Faring Worse,” CNBC (June 19, 2020) and Black Knight

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