There's been increasing concern over a pending foreclosure tsunami after federal foreclosure moratoriums expired at the end of July 2021. Meaning August -- the first full month that servicers and lenders could foreclose on delinquent mortgages regardless of COVID-19's impact on borrowers -- would be the first big indicator of what could be in store for the housing market.
According to ATTOM Data Solutions, foreclosure starts jumped 27% higher than the month prior and were 49% higher than August 2020, but they are still well below pre-pandemic levels.
What the numbers tell us
Foreclosure rates have been artificially low for over a year and a half now, thanks to protections enacted by the moratoriums and relief granted through forbearance plans. Many believed the end of the moratoriums would spark a tsunami, but it appears that's far from the case.
Prior to the onset of the pandemic, foreclosure starts for August 2019 were nearly 28,000 nationwide. In August 2021, foreclosure starts were only slightly over 8,000 -- three times less. While foreclosure numbers are on the rise, we're still a far way off from a flood of foreclosures hitting the market.
According to Attom Data Solutions, the states that saw the largest increases in foreclosure starts were not a huge surprise, given they each make up a huge portion of the United States population:
- California: 1,240 foreclosure starts.
- Texas: 1,060 foreclosure starts.
- Florida: 643 foreclosure starts.
- Illinois: 506 foreclosure starts.
- New York: 479 foreclosure starts.
Why a tsunami is unlikely, at least for now
A great number of lenders and servicers are still working through mortgage forbearance plans. New forbearance applications are up 25% in August compared to the five weeks prior, meaning there is a new need for financial relief in the marketplace. The number of active forbearance plans as of August 2021 remains just below 1.6 million households, with more than 960,000 plans expiring in September and October of 2021.
Most foreclosures don't start until loans are 90+ days delinquent, meaning lenders and servicers may wait that period after exiting forbearance before initiating foreclosure. If that is the case, we won't start to see numbers steadily increase until 2022.
It's important to remember that given the current level of equity among homeowners today, there's a strong chance foreclosure starts won't necessarily lead to foreclosure outcomes. Many homeowners will be able to list their homes for sale and use the proceeds to pay off the loan.
The Millionacres bottom line
There's a large number of homeowners still out of work or earning less than they did pre-pandemic. The hope and goal are that the economy will continue to recover, but naturally, foreclosures will rise. How quickly and how soon is what remains in question.
Real estate investors should keep a close eye on the data for successful forbearance exits and new foreclosure starts in September and October, as they provide the greatest insight into the state of the distressed marketplace and what could be in store in the near future.