COVID-19 has put a great many Americans out of work, both from people naturally staying home (and not spending) and from government-ordered lockdowns. The people hurt the most tend to be low-wage workers.
Eviction moratoriums were put in place to keep renters from being evicted for nonpayment of rent due to COVID-19 hardships. In the same vein, foreclosures are banned for the nearly 3 million homeowners with a loan backed by the federal government who are behind on their mortgage payments. This foreclosure ban means less inventory for investors.
The CFPB proposal
Under the federal Coronavirus Aid, Relief and Economic Security (CARES) Act, a 60-day moratorium was put in place in March 2020 of foreclosures against homeowners with federally backed mortgages -- FHA, VA, USDA, and conventional loans backed by Fannie Mae (OTCMKTS: FNMA) or Freddie Mac (OTCMKTS: FMCC). But that's old news.
The foreclosure relief was extended to June 30, 2021, and the newest proposal by the Consumer Financial Protection Bureau (CFPB) is to extend the foreclosure ban until 2022.
What the proposal includes
- Time for borrowers to explore: The proposal prohibits mortgage lenders of federally backed mortgages from starting foreclosure proceedings until after Dec. 31, 2021, to give borrowers time to consider their options on how to resume making payments.
- Options for lenders: The CFPB is allowing lenders to offer streamlined loan modification options for borrowers with financial hardships due to COVID-19 without all the documentation normally required.
- Inform borrowers: Lenders must tell borrowers their forbearance options.
But what about non-federally backed mortgages?
Mortgages backed by the federal government logically would follow government mandates, but what about mortgages not backed by the federal government? The CFPB has issued a statement to these private mortgage lenders: "Our first priority is ensuring struggling families get the assistance they need. Servicers who put struggling families first have nothing to fear (italics mine) from our oversight, but we will hold accountable those who cause harm to homeowners and families," says CFPB acting director Dave Uejio. There's no explanation regarding what "hold accountable" entails.
How foreclosure moratoriums worked last time
During the 2008 recession, major lenders, under pressure from the federal government, stopped foreclosures for one month under Project Lifeline to determine whether a plan could be worked out to keep delinquent borrowers in their homes. The situation then was exacerbated by a decline in housing prices. The remedy for people who can't afford their mortgage is typically to sell, and if there's equity in the home, they can use that to get into a more affordable solution. But if there isn't equity, perhaps due to a decline in housing prices, as what happened in 2008, homeowners are in a bad spot and probably need help.
But this time around, house prices are skyrocketing. Although people who can't afford their mortgage could sell -- and if left alone, they often would -- a foreclosure moratorium keeps people in a situation they normally wouldn't be in. The assumption then (in 2008) and now is that foreclosure wouldn't be in the best interest of the homeowner or lender, even when the threat of foreclosure might be the best solution.
For example, home prices are up nationally, so it might be a good time to sell -- when homeowners have the most equity and before foreclosure proceedings begin. But if homeowners stay in their homes because of foreclosure bans, they might miss out, as home prices could drop in the future. And then, these homeowners might not be in a better position.
A study on foreclosure delay
A 2015 study published in the National Bureau of Economic Research (NBER), which analyzed the impact of foreclosure delays on U.S. employment, showed how foreclosure moratoriums can do more harm than good. Many homeowners in forbearance weren't motivated to find jobs. The study found that "foreclosure delays decreased mortgagor employment by about 0.75 percentage points."
And the longer the foreclosure delays, the worse the problem. "Severe foreclosure delays, such as those observed in Florida and New Jersey, can depress mortgagor employment by up to 1.3 percentage points." This doesn't bode well for the economy, not to mention the costs lenders and loan servicers must bear. It's similar to landlords under eviction moratoriums, who still must pay taxes and insurance on homes.
The Millionacres bottom line
Just as before, the foreclosure moratorium is supposed to be temporary, a pause to give homeowners a chance to work something out. Back then, it was one month. Today, the proposal is to extend this moratorium through December 2021, artificially keeping houses off the market for close to two years at a time when inventory is severely limited. This effectively keeps many first-time homebuyers and investors out of the market.
On its website, the CFPB says it's "seeking public input on that date, as well as whether there are more limited ways to achieve the same purpose." If you, as an investor, have input, now's the time to let the CFPB know.