All eyes are on September. This month is the start of forbearance expirations; around 700,000 are expected to be due for review and just over 400,000 forbearance plans are set to lapse. This pending "crisis" where a flood of delinquent homeowners are expected to begin paying again has only three potential outcomes, all of which will impact the real estate market in significant ways. Here's how the scenario could unfold.
1. They repay, hooray!
In scenario one, the homeowner actually starts repaying. This could include a new payment plan that rolls any missed payments and accrued interest during the forbearance period into the unpaid balance and re-amortizing the loan at an agreed-upon interest rate and term. It could also include adding a secondary payment to the current mortgage payment, which would bring the borrower current over a period of time (could range from 6 months to two years). In either scenario, the borrower becomes current and continues to pay, staying in their home, a true win-win, and the outcome that would have the least impact on the real estate market.
2. The delinquency continues, home-sale ahead
Scenario two: The borrower is unable to become current, and upon expiration of the forbearance plan, the borrower becomes seriously delinquent. With the expiration of moratoriums, lenders in most states and jurisdictions are able to file foreclosure. To stop a foreclosure, the borrower sells the property in the traditional market.
Right now, while inventory still remains low, and with the highest level of homeowner equity in history, there's a good chance the borrower would be able to sell and pay off the mortgage, using any proceeds from the sale to purchase a new home or move into a rental property.
However, in the event that a large number of homeowners flood the market with inventory within a short time span, it could cause certain markets to cool and slow price growth and speed of sales. If the market turns completely, some homeowners could be forced to flash sell, taking less money for the home in order to avoid foreclosure.
3. Foreclosure pending
The third and final scenario is that the borrower doesn't sell the home despite continued delinquency, and the property is taken through the foreclosure process, either selling at foreclosure auction to an investor or becoming a real estate-owned (REO) property, which is typically sold in bulk to institutional investors or listed on the traditional market with an agent.
Foreclosures are expensive and timely for servicers and lending institutions and puts financial strain on the company, which could lead to some banks selling non-performing loans to recoup capital and be relieved of the financial burden of managing a non-performing asset. Similarly to scenario two, if this happens all at once, or in addition to a large number of homesellers listing their property, it could lead to an imbalance in the marketplace and cause real estate values to lower.
The likely outcome
As much as I would love to see scenario one be the dominant outcome, statistically it's unlikely. As of mid August 2021, 1.75 million homeowners (around 3.3% of all mortgages) were in an active forbearance plan. Of the 7.3 million homeowners who were in forbearance since the onset of the pandemic, 24% remain outstanding. From June to July, roughly 1% of the total active forbearance plans exited successfully. At the current rate, by year's end, around 19% of the 1.2 million loans would still be due.
Rather, it's likely a combination of the three scenarios will play out, with some government intervention possibly restricting the number of foreclosures that hit the market in a given quarter to try to keep the real estate market from toppling from excess inventory. The government has been quick to step in to help keep financial markets moving since the start of the pandemic, and it's likely that support would continue as expirations and long-term delinquencies impact servicers and lending institutions.
I think real estate investors should be watching the market carefully. We're already starting to see signs of the market cooling, as an increased number of homes hit the market. If accelerated by the last two scenarios, the market could be headed in a new direction in the near future.