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Experts Say Foreclosure Spike Unlikely as Owners Exit Forbearance

Mortgage bankers say most (77%) homeowners in forbearance already have a payment plan in place – and many who don’t will likely sell rather than go through foreclosure. For most sellers, high home prices will allow them to pay off the mortgage and not even ding their credit scores.

WASHINGTON – The national forbearance moratorium for federally backed mortgages ends on July 31. But rather than go into foreclosure, most homeowners will exit with a payment plan in place, according to most housing analysts – and a foreclosure spike big enough to significantly affect the housing market’s health is unlikely.

About 2.7 million homeowners are behind on their mortgage payments, and 1.8 million are seriously delinquent (90 days or more past due and in foreclosure). But 77% of homeowners in forbearance programs have a loss mitigation repayment plan in place, according to the Mortgage Bankers Association.

About 15.3% of homeowners have already exited their forbearance period without a workout plan – about 400,000 homes.

As National Association of Realtors® (NAR) researcher Gay Cororaton notes in a recent post at the association’s Economists’ Outlook blog: “There is no data on whether these homeowners exited forbearance without a loss mitigation plan in place because they can affordably pay the mortgage, or whether they will likely end up in foreclosure and on the market. If all these 400,000 homes go into foreclosure and get listed, that will add about 24 days of supply to the housing market given the current monthly sales pace of 483,333 existing homes.

“If only one-third of these homes end up on the market, that’s 133,200 homes, which will add just 8 days of additional supply. If two-thirds of these homes end up on the market, that’s about 268,000 homes, which will add 17 days of supply. Given that only 1 in 10 borrowers are opting to list their homes, the more likely scenario is that one-third or even less of the 400,000 that exited forbearance could end up as listed homes, adding some relief to the tight supply – not a glut that could depress prices.”

Homeowners with Federal Housing Administration (FHA)-backed mortgages may be most at risk since more are delinquent on their loans, according to an analysis from the American Enterprise Institute. Nearly 15% of 7.6 million FHA mortgages outstanding were delinquent as of May, according to the study, and about 11% were considered “seriously delinquent.” These include loans that are in forbearance, which during the pandemic has allowed struggling homeowners to pause their mortgage payments.

The number of Americans still requesting forbearance has fallen in recent weeks. Many Americans who already exited forbearance have resumed making their payments or were able to modify their loans.

“If a modification is unable to address the delinquency, the next option is for the borrower to sell the home,” according to the report, written by American Enterprise Institute Housing Center Director Edward Pinto and Research Fellow Tobias Peter. “Given the rapid level of home price appreciation, this alternative should allow many distressed owners to avoid foreclosure, pay off the mortgage, cover selling expenses and maintain one’s credit record.”

Struggling homeowners who can’t modify their loan or sell may face a foreclosure.

“As a result, a buyer’s market could develop in ZIP Codes with heavy exposure to such borrowers,” the researchers wrote, notably areas where there is a high concentration of FHA loan delinquency.

Source: “These Are the Cities With the Biggest Share of Homeowners in Danger of Foreclosure,” MarketWatch (July 6, 2021) and “The Forbearance Period Is Ending: What’s the Impact on Foreclosures, House Prices, Supply, and Homeownership?” National Association of REALTORS® Economists’ Outlook blog (June 28, 2021)

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