At the onset of COVID-19, congress passed the CARES Act which offered financial relief, including mortgage forbearance, to Americans who were impacted by shutdowns. Under the CARES Act, homeowners could request forbearance from their mortgage payments for up to 12 months. So what happens in March and April 2021 when the 12 months of forbearance protection ends for many borrowers?
We spoke with Marina Walsh, Vice President of Industry Analysis, Research and Economics at the MBA, about what recent MBA forbearance survey data tell us about the potential for a foreclosure wave in 2021.
Forbearance numbers do not directly reflect the number of distressed borrowers
In April, the MBA launched a weekly survey of forbearance, which shares updated forbearance data across the country each Monday. With these reports, the MBA could see clear trends among borrowers in forbearance.
Notably, the weekly data indicated that some borrowers in forbearance were not in distress.“In May, almost 30% of borrowers in forbearance were still making their monthly payments,” Walsh said. “A lot of these borrowers may have entered forbearance as an insurance policy.” At the same time, other borrowers were in distress and missing monthly payments, but not on a forbearance plan. “MBA was part of a marketing campaign to encourage these distressed borrowers to reach out to their servicer,” Walsh said.
Over the summer months, forbearance numbers dipped when the economy began to reopen; however, when lockdowns were reinstated in the fall and winter months, forbearance requests started to rise again. Walsh noted that a lack of clarity around the deadline for requesting forbearance under the CARES Act may have also spurred last-minute surges in new forbearance requests in December among borrowers who were unsure if initial requests for forbearance would be extended past 2020.
Recently, the Federal Housing Administration and USDA — agencies with borrowers that have been especially hard hit by the pandemic —did indeed extend this deadline to request initial forbearance through the end of February.
The concern: forbearance is increasing among distressed borrowers
Walsh noted that the forbearance rate is higher among Ginnie Mae borrowers compared to Fannie Mae and Freddie Mac borrowers. These are borrowers with Federal Housing Administration (FHA), Veterans Affairs (VA), Rural Housing Service (RHS), and Public and Indian Housing (PIH) mortgages. “These borrowers are more likely to be in service industries most impacted by the pandemic,” Walsh noted.
While the potential of the COVID-19 vaccine is promising in reopening the economy on a more permanent basis and getting distressed borrowers back in more stable employment situations, many homeowners may still face adversity when the CARES Act protections expire for them in the Spring. Fortunately, loss mitigation options such as loan deferral programs and modifications may be available to these homeowners.
A deluge of foreclosures is unlikely
Even if borrowers in distress are unable to maintain their mortgage when the forbearance period lifts, Walsh said a wave of foreclosures all at once is unlikely.
“I doubt there will be widespread foreclosures when foreclosure moratoriums lift and homeowners reach the end of their 12 months of forbearance,” Walsh said. “We have a housing inventory shortage across the United States and equity accumulation among many homeowners which provide loss mitigation alternatives to foreclosure for distressed borrowers.”
In addition to loan deferrals and modifications as options upon exiting forbearance. she pointed to repayment plans, deed in lieus, cash for keys, loan payoff by selling the home, and even short sales as alternative options to foreclosure for homeowners.
The foreclosure process can be quite grueling and could take 3 or more years in certain states, especially those states requiring judicial proceedings. Most servicers will not only want to help homeowners but will want to avoid these extensive delays.
Mortgage & title professionals prepare
While a wave of foreclosures all at once is unlikely, mortgage and title businesses should prepare for an uptick in transactions from inventory opening up or unusual transaction types that result from borrowers avoiding foreclosure, or vacant and abandoned properties. Having the right technology in place to manage transaction volume efficiently will make all the difference.