Talk about a pending "foreclosure wave" has flooded news and media outlets for months. With millions of homeowners at risk of foreclosure as foreclosure moratoriums near expiration, the concern could very well become a reality. Which is why the Consumer Financial Protection Bureau (CFPB) recently proposed a rule that would restrict all servicers and lenders from initiating foreclosure on any primary residence until January 1, 2022. Here's what real estate investors need to know.
It will stop the foreclosure wave, but is it the right solution?
This proposal, which still requires final approval before becoming law, would apply to all mortgages on a primary residence both on a private and federal level, granting a "temporary COVID-19 emergency pre-foreclosure review period" which would last until December 31, 2021. The proposal would also offer additional programs and review policies to help get homeowners into a more affordable payment agreement or forbearance agreement faster.
Black Knight's (NYSE: BKI) recent mortgage report believes there are an estimated 1.7 million mortgage loans delinquent and at risk for foreclosure as of February 2021. Right now, moratoriums have granted protection to homeowners who experienced a COVID-19-related loss that impacted their ability to pay a mortgage on a primary residence as well as all federally backed mortgages (FHFA, FHA, USDA, and VA). Continuing the foreclosure moratorium would surely stop the "foreclosure wave" from crashing down, would also greatly impact the real estate financial markets.
Foreclosure moratoriums would further contribute to the housing shortage, which continues to push real estate prices to all-time highs, while also placing the burden to carry the financial obligations of financial institutions and servicing companies on the U.S. taxpayer. The government has been pumping billions of dollars into the secondary mortgage and bond market to help support the liquidity needs of servicers and lending institutions over the past year. Stalling foreclosures and broadening forbearance and loss mitigation programs would equate to billions of dollars more being needed, and ultimately repaid by U.S. taxpayers.
Will it pass?
Right now is an interesting time for our economy. Millions are faced with financial hardships as a result of the COVID-19 pandemic, yet despite initial job losses, businesses are struggling to fill vacant employment positions. Concerns over returning to the workplace are coupled with a controversial debate as to whether additional unemployment benefits are motivating the unemployed to stay unemployed. The same can be said for mortgages. While many homeowners truly are struggling to pay their mortgage, this could largely be due in part to the protections offered for qualifying mortgages.
According to Black Knight, home values were up 11.6% in February, the highest annual rate in more than 15 years. This means homeowners have more equity in their homes. If necessary, it's likely the homeowner could sell their property profitably and move into another property. This would help balance the real estate housing shortage naturally, providing more investment opportunities to investors, and possibly balance the demand for rental real estate in certain markets that have experienced a shortage lately.
Right now, the ruling has not passed into law. Considering the terms of the proposal, it will likely receive a lot of pushback as policymakers consider its long-term financial impact on the markets, but only time will tell if this will become law or not.