Forebearance to Foreclosure

With investors and first-time home buyers unable to buy homes, the US housing market will not withstand the wave of foreclosures, according to a new report by a technology-based real estate broker. In the Eastern District court, corporations are filing for bankruptcy, despite billions of dollars in federal aid, and small businesses closing their doors.  The economy is being stabilized by a finite amount of tax-payer dollars that only give short-term hope for those in need.  As Michiganders, we have seen this before.  Unfortunately, that lesson seems to be forgotten as restrictions cripple local businesses and homeownership is driven by low interest rate mortgages.  

More than 2.3 million homeowners are still in arrears, and 9.2% of those homeowners have failed to meet their current mortgage payments. Today, about 8 percent of homeowners have opted for forbearance on mortgages, but 5.46 percent of homeowners are still in a protective shell, according to the Mortgage Bankers Association. About 5 to 6.5 percent of current homeowners with a mortgage, or 1.4 to 3.7 million homeowners facing foreclosure, are in the “preventive bracket,” which is a monthly payment of $1,000 to $2,500 for their mortgage.  Some homeowners are misinformed as they believe that forebearance means forgiveness.  The non-payment is still accountable to those with a mortgage and their credit score may reflect that decision of non-payment.

While some homeowners who are overleveraged and unaware of their options will contribute to this wave of foreclosures, most will be able to refinance their mortgages or work with lenders to cash in on rising home prices. If not, they will be foreclosed, and most of them will either sell or leave without equity. While some of these homeowners, who are overleveraged, will of course contribute to the wave, while some of these homeowners will be underleveraged and uncertain of themselves and not exercise their option, many will sell or even be able to work with a lender to refinance or sell their mortgage to make money with rising home prices, but most will not be able to negotiate a deal with the lender on refinancing a mortgage and selling for cash.

If leniency is not extended within 12 months, and a large portion of these homeowners are still unemployed, foreclosures and distressed sales could increase, putting downward pressure on house prices. If we do not see a recovery in the supply of homes for sale soon, I would suggest that we will see a significant increase in supply when homeowners who are no longer able to service their mortgages.  Those in forebearance will have to start paying their mortgages again.  

With housing prices still rising, people in a bad situation still have the option of selling their home to avoid foreclosure, but there is no reason to panic yet. The foreclosure moratorium has expired, and homeowners with federally subsidized loans have options to fall back on as long as you make your mortgage payments anyway. In the current situation, borrowers have a few months to find out whether they can resume their payments. If you don’t have to be lenient, don’t rush to sell your house. Mortgage holders can still get 180 days to sell their home, or find some alternative financing, before they must find another home.     As a result, homeowners who can no longer pay their mortgage after the foreclosure period is likely to sell at a profit, pay off their mortgages after the foreclosure period expires, or are less likely to go into foreclosure than those who do.

Steve Unruh


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