That dreaded foreclosure wave may not be coming, two reports assert

While analysts have expressed concern foreclosures could overwhelm servicers when forbearance ends, new data suggest that outcomes will be manageable in most areas.

That’s in part because the Biden administration’s extension of borrower relief measures this week will give borrowers more time to recover. Also, the number of households with long-term forbearance is stabilizing, and a recent analysis suggests many distressed homeowners ultimately won’t enter foreclosure.

There were 841,977 borrowers in the government-sponsored enterprise forbearance plans in November, down from 922,589 the month before, according to the Federal Housing Finance Agency. That decrease, combined with broader declines in unemployment, means the incidence of distress is stable to lower for the average mortgage borrower.

Even in the more vulnerable Ginnie Mae market, borrowers have a strong home equity buffer against foreclosure, the Urban Institute found.

Thanks to home price appreciation, these borrowers have on average a 22% equity buffer and only 3.6% have negative equity, according to the Urban Institute. This presents a contrast to the Great Recession, when negative equity peaked at 30% and foreclosures surged.

Traditionally, borrowers are considered to have strong financial incentive not to abandon efforts to repay when they have at least 20% equity in their home.

To be sure, the extent to which foreclosure risk will grow is unknown as forbearance activity is fluctuating. Additionally, servicers will be busy with other forms of loss mitigation like modifications that make loan terms more affordable even if they aren’t processing foreclosures, per se.

The number of GSE borrowers entering forbearance plans inched up to 59,203 from 58,016 and completions dropped to 57,133 from 83,404 in the Federal Housing Finance Agency’s latest foreclosure prevention report.

Also, while much of the market may bear up due to strong equity levels, distress could be compounded in a limited number of local markets that were left out of the broader housing boom.

Some of these are markets feature home prices that may have been artificially inflated by loans made with little regard to borrowers’ ability to repay in the leadup to the Great Recession. Most housing markets' prices recovered from subsequent depreciation but some did not. Housing values are considered more stable now than they were then due to relatively tighter underwriting and ATR regulation.

“Home prices in some parts of the country, including Chicago, Illinois; Baltimore, Maryland; and Riverside, California, are still below their pre-crisis peak,” the Urban Institute researchers said in their report. “These areas are where we may see a greater number of actual home foreclosures.”