Of the at-risk homeowners leaving forbearance, 73% have at least 20% home equity – and 28% have at least 50%. They may sell but they can avoid foreclosure.
DENVER – Millions of U.S. homeowners took advantage of a government program that provided them a reprieve from mortgage payments when their finances took a hit during the pandemic.
As the clock runs out on those “forbearance” agreements, a large majority of homeowners who sought relief have exited and are back on track with their payments. Just over 1 million active forbearance plans were still in place in mid-November, down from a high of nearly 5 million forbearance plans in the early days of the pandemic, according to Black Knight, a real estate data provider in Florida.
“Most borrowers, even though they had the ability to skip payments, kept paying,” said Michael Fratantoni, chief economist at the Mortgage Bankers Association during a panel on the topic hosted by the National Association of Real Estate Editors in Miami on Wednesday. That makes it unlikely a surge in distressed sales and foreclosures will roil the markets in the months ahead, he and other experts on the panel predicted.
There will be somewhere around 180,000 mortgages in foreclosures this year, said Rick Sharga, an executive vice president with RealtyTrac. Before the pandemic, foreclosures were averaging closer to 500,000 a year, Sharga added. And although he predicts foreclosures will rise sharply in the months ahead on a percentage basis, it will be from a very low base. It won’t be until late next year when the volume returns to historic levels.
A big reason foreclosures won’t swamp the market is that many troubled borrowers have enough equity in their homes to sell and move on, even if that isn’t their preferred course. And buyers are waiting to snap up any that do show up.
RealtyTrac, in an analysis released Wednesday, estimates that 73% of borrowers currently in foreclosure have equity of 20% or more, while 28% had equity greater than 50% in the third quarter.
In Colorado, only 2% of homeowners are seriously underwater on their loans and 93% have positive equity, according to RealtyTrac.
During the housing boom and bust, about a third of all homeowners, not only those in foreclosure, owed more on their mortgages than their homes were worth. Those who got behind had no easy way of escape and a reduced incentive to try to hang onto their homes.
Although many struggling homeowners have home equity this time around, some also have damaged credit scores and diminished incomes that block them from tapping that equity, said Jim Riccitelli, CEO of Unlock, a new financial-tech firm that helps struggling borrowers tap the equity they couldn’t otherwise access.
Aside from turning to a specialized lender, the resale market does offer troubled borrowers with equity a quick out. About half of listings that hit the metro Denver market sold in five days or less last month, according to a report last week from the Denver Metro Association of Realtors.
But those struggling borrowers need to replace the homes they are leaving. And unlike during the housing crisis, the rental market is much less favorable and vacancy rates much lower.
In short, most troubled borrowers can get out, but they may not like the place they find themselves on the other side.
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