Forbearance Will Not Lead to a Huge Wave of Foreclosures

Previously I wrote Forbearance, Delinquencies and Foreclosure and I argued:

With house prices up sharply year-over-year … very few borrowers will have negative equity, and most seriously delinquent borrowers will be able to sell their house, as a last resort, and avoid foreclosure.

So, although foreclosures will increase from the record low levels, it will take some time (probably in 2022), and there will not be a huge wave of foreclosures like following the housing bubble.

First, the MBA estimates there are 1.6 million homeowners in forbearance:

The Mortgage Bankers Association’s (MBA) latest Forbearance and Call Volume Survey revealed that the total number of loans now in forbearance decreased by 2 basis points from 3.25% of servicers’ portfolio volume in the prior week to 3.23% as of August 29, 2021. According to MBA’s estimate, 1.6 million homeowners are in forbearance plans.

Here is some new data from Black Knight’s July Mortgage Monitor. First, here is a graph of scheduled expirations of forbearance plans. There will be quite a few plans expiring in September and October.

From Black Knight:

• Under the various matrices as they stand, 415K plans will reach their final forborne payment in September, including more than 175K FHA/VA, 125K GSE and 114K portfolio/privately securitized loans

• That’s nearly 20K loans leaving forbearance per business day in September, which servicers must then process through complex post-forbearance loss mitigation waterfalls

• Another 240K active plans are set to reach their final forborne payment in October, followed by 163K in November

• In total, more than 1M forbearances (>60% of active plans) will reach their final expiration over the final four months of 2021, on top of the >150K that already expired in recent months

However, almost everyone has significant equity. From Black Knight (emphasis added)

Of borrowers still in plans as of mid-August, some 98% have at least 10% equity in their home – a drastically different dynamic than during the worst of the Great Recession, when more than 40% of all mortgage holders had less than 10% equity and 28% were fully underwater.

Even when adding 18 months of deferred principal, interest, taxes and insurance payments onto the total debt amount, only 7% of borrowers in forbearance have less than 10% equity in their home

The bottom line is that most homeowners in forbearance have sufficient equity in their homes, and there will not be a huge wave of foreclosures like following the housing bubble.