There’s an overwhelming amount of data and headlines circulating. This column is my attempt to make sense of it all for you, the real estate professional, from an overall economic standpoint.
Several weeks ago, we explored a new program put in place by the Federal Housing Finance Authority (FHFA) to assist homeowners impacted by COVID-19 — and that program was, of course, mortgage forbearance.
Well, the forbearance program has been in place for a little more than two months now, and one of my viewers asked if I would provide an update to let everyone know what’s going on with the program, whether it’s a success or if there’s anything that homeowners or real estate agents should be worried about.
And it’s a great question, so let’s take a look.
Before COVID-19 struck, there were roughly 1.4 million homeowners who were behind on their mortgage payments.
And of that group of 1.4 million, one-third — or 450,000 — had entered forbearance by the end of April, but two-thirds — or 930,000 — had not.
Now, after COVID-19 appeared, we saw an additional 2.2 million mortgages become delinquent, but of those, a full 85 percent — or 1.9 million — entered forbearance with just 330,000 not taking the offer up.
In total, at the end of April, there were 4.25 million homeowners in forbearance, but only 3.6 million were past due on their mortgages, leaving 650,000 owners who were current with their mortgage payments but still in forbearance.
What’s happened since the end of April?
Well, the total number of homeowners entering forbearance has risen by around 410,000 to 4.66 million.
But when we look more closely at the numbers, 52 percent of households in forbearance had made their April mortgage payment.
That sounds great, but I would caution that payment data through early June shows that only 22 percent of borrowers had made their May payment.
In essence, my read on this data is that a fairly significant percentage of owners took forbearance out of caution, rather than necessity — which is borne out by the number of homeowners who are still making mortgage payments — and they are able to do so either because they are still working, or they are using the generous unemployment benefits that are in place in addition to savings.
Where are we today?
Of the 4.66 million homes currently in forbearance, the greatest number are Fannie- or Freddie-backed mortgages, followed by FHA or VA loans and then non-agency mortgages.
It’s no surprise to see FHA or VA loans with the greatest percentage of mortgages in forbearance, as they accept lower down payments and lower credit quality than their GSE counterparts.
I am pleased to report that the number of homeowners in active forbearance has started to drop.
After peaking toward the end of May, the number of homes entering forbearance has fallen for the past two weeks — by 34,000 at the start of June and by 66,000 last week. This is certainly good news, and I do expect we will continue to see the numbers drop as we move through the summer and more owners return to work or start to feel more comfortable with their personal economic situation.
Where does this leave homeowners in forbearance?
So, we know that 8.8 percent of all residential mortgages are currently in forbearance and another question I get asked a lot is whether all the homes in forbearance will end up being foreclosed on; because if that were the case, it could certainly have the potential to depress home values across the country.
It’s a really great question, and to answer it, we need to understand the equity positions of homeowners in forbearance. This is very important when considering what may happen down the road.
As you can see here, only 9 percent, or roughly 420,000 homes in forbearance have less than 10 percent equity, and it’s this population that is at significantly higher risk of foreclosure if they are not able to get back on track once they come out of forbearance. And this is because, depending on circumstances, if a homeowner has less than 10 percent equity, it’s more likely, but certainly not guaranteed, that they may just walk away from the home.
There’s also roughly 12 percent of owners who have between 10-20 percent equity, and they are in a bit of a gray area, but I still don’t see a significant number entering foreclosure down the road.
Now, a full 80 percent of owners in forbearance have more than 20 percent equity in their homes, and that is a very good incentive to not go into foreclosure. This level of equity provides options for servicers to come up with a plan to get the homeowner back on track when they come out of forbearance.
The bottom line: I find it highly unlikely that we will see a significant number of homes in forbearance enter foreclosure.
In conclusion, allowing forbearance was a smart move on behalf of the FHFA, though there was certainly significant confusion when the program first appeared. But we are not out of the woods quite yet. Even though we are seeing a modest drop in the total number of homes in forbearance, I believe that the program is going to remain with us for some time to come.
But, as I hope to have demonstrated to you today in the video above, I do not see any significant need to be concerned that homes in forbearance are going to have any sort of negative impact on the U.S. housing market. And when all is said and done, I believe the forbearance program will be looked back on as being a plan that offered adequate protection to homeowners who, through no fault of their own, found themselves stretched financially by COVID-19.
To get the big picture including all of the data, watch the full video above.
Matthew Gardner is the chief economist for Windermere Real Estate, the second largest regional real estate company in the nation. Listen to him speak at Inman Connect Now.