Where foreclosure risk infiltrates a historically hot housing market

The coronavirus era brought radical change to the housing market, driving interest rates to all-time lows, home value appreciation to a pace not seen since the 1970s and loan distress to millions of borrowers.

Overall mortgage health increased as the economy recovered but nearly 2 million forbearance plans remain. In 2020, most servicers had a high percentage of borrowers in forbearance who used it as an insurance policy while staying current on their loans. Borrowers still under plans have a higher risk of ending up in foreclosure.

“You're going to see a lot of scrambling where people find out they have a very big ticket expense,” said Thomas Showalter, founder and CEO of Candor Technology. “It's going to be a bit chaotic and I seriously doubt the average delinquent borrower is prepared because I think most of them thought the past due interest payments were forgiven as opposed to forborne.”

Opinions differ on whether a foreclosure tsunami is on the horizon or if servicers will encounter only a moderate uptick. It’s a fluid situation, one likely to evolve according to how the pandemic progresses, given the emergence of the delta variant and other factors such as how states distribute homeowner relief aid.

To measure COVID-19’s effects, the Census Bureau created the Household Pulse Survey. The latest survey with data through July 5 showed 36% of households are not current on their rent or mortgage payments. That share will likely face eviction or foreclosure in the next two months, according to Sara Rutledge, founder and principal economist of SRR Consulting.

Decade-high equity levels should help keep many borrowers insulated from losing their homes, given that mortgage underwriting standards are as pristine as they’ve ever been, according to RealtyTrac Executive Vice President Rick Sharga. But not every city experienced exponential price growth nor are they all expected to become boomtowns in the next year. Borrowers with lower financial stakes in their properties and higher debt-to-income ratios — such as those with FHA loans — will find themselves in turmoil.

“Areas where employment was disrupted by the pandemic the most are the areas most vulnerable to mortgage distress,” Sharga said. “The answer is jobs, jobs, jobs.”

Across the country, Attom Data Solutions analyzed coronavirus-related mortgage foreclosure risk in the second quarter of 2021 by looking at a combination of factors, including the number of homes underwater, foreclosure filings and affordability in each area. The analysis included 564 counties with populations of at least 100,000 and 50 single-family home and condo sales during the quarter.

Among the 250 most vulnerable counties, Florida led the nation by accounting for 31, followed by 26 in California, 19 in both Illinois and Ohio and 17 in New Jersey.

Outside of Philadelphia, Delaware County, Pa., ranked as the country’s most vulnerable market. It had a 36.4% share of homes underwater at the end of the first quarter, about 0.05% of mortgaged properties filed for foreclosure as of the second quarter and it takes 51.7% of the average income to buy a median-priced home there.

Chicago-adjacent Kendall and McHenry Counties came next with 15.2%, 0.07% and 39.3%, and 19.3%, 0.06% and 34.1% splits, respectively. Passaic County, N.J., and Butte County, Calif., rounded out the top five while the remainder of the top 25 had six counties in New Jersey, five in Illinois, two in both Florida and Louisiana, and one each in Arizona, Connecticut, Delaware, New York and South Carolina.

“We have about 5,000 loans in active forbearance in Florida, 2,500 in New Jersey, 650 in Chicago and around 300 in Philadelphia. I think our loan portfolio mirrors the industry,” said Bob Hora, SVP of default operations at Cenlar. “These vulnerable areas are definitely an issue and I expect to see a lot of foreclosure activity in those places.”

The Consumer Financial Protection Bureau added new foreclosure rules and multiple caveats to aid struggling borrowers maintain homeownership. Of course, foreclosure stands as a last resort in the mortgage community. Servicers and subservicers are increasing their staff in order to better process increased loss mitigation plans and avoid home repossession as government programs expire.

“When the moratorium ends, servicers may still need to walk a fine line and go easy on foreclosure activity to ensure they don’t run afoul of the CFPB or Federal Housing Finance Agency,” said Joe Panebianco, CEO at AnnieMac Home Mortgage. “One possible scenario is we may see more deed-in-lieu activity as opposed to full blown foreclosures. It is a quicker and cleaner process for borrowers who are willing to vacate homes and there is less political and regulatory risk surrounding that path.”