Experts Hopeful End of Virus-Related Mortgage Forbearance Will Have Minimal Impact on the Housing Market As a Whole

One key protection for homeowners financially impacted by the COVID-19 crisis has ended, and another will very soon. The federal moratorium on certain foreclosures expired on July 31, 2021, and the option to request up to an initial six-month forbearance on mortgage payments for certain federally backed mortgage loans – or extend a current forbearance for up to another six months – sunsets on September 30.

With 1.75 million homes still in forbearance as of July 23, the impact of virus-related forbearance programs winding down on the housing market as a whole is uncertain.

Another housing crash, however, is less likely – in part because of lessons learned in 2008.

According to Mary Babinski, Senior Loan Officer with Motto Mortgage Champions in Trinity, Florida, many of the lending regulations put into place after the housing crash should help prevent another crisis. “It’s not that we’re not going to see any foreclosures, but I don’t think it will be an influx like before, because in 2008 people had loans they should have never been given, and also had adjustable rates with significant increases so their payments went up drastically and suddenly while property values generally were falling or staying stagnant.”

We are in a much healthier lending climate now,” she adds.

Here are three key differences between 2008 and 2021:

1. Lending practices have changed significantly

According to Scott Miller, an agent with RE/MAX of Boulder in Colorado, the lending philosophy prior to 2008 was different from today’s practices.

“The lending policies were a lot looser [leading up to 2008],” Miller says. “A lot of lenders were using products like payment option or teaser rate adjustable-rate mortgages to get borrowers into houses they probably wouldn’t have qualified for if they had been done as a fixed rate fully amortized loan. That set up a lot of people to have trouble when the economy turned and housing values declined.”

New lending regulation was one of the primary outcomes of the 2008 crash, including the creation of the Consumer Financial Protection Bureau (CFPB), a government agency dedicated to protecting borrowers.

These requirements and limitations are intended to help make sure borrowers aren’t overextending themselves when taking out a home loan, which would put them at risk for foreclosure in a downturned economy.

During the pandemic, the CFPB has played a key role in establishing rules and guidelines to assist homebuyers. As the foreclosure moratorium ends, CNBC reports that the agency recently finalized a new rule that will go into effect on August 31, 2021 and is designed to help homeowners who are behind on their mortgages and facing the end of their forbearance programs get back on track, including:

• Creating a special loss mitigation application that must be completed and submitted by the borrower and thoroughly reviewed by the loan servicer to ensure that all foreclosure avoidance options (such as a short sale or special payment plan) have been exhausted before the loan servicer can begin the foreclosure process

• Requiring loan servicers to make reasonable efforts to reach borrowers before starting any foreclosure proceedings if the borrower has been unresponsive for more than 90 days

• Requiring servicers to confirm a property has been abandoned under local and state laws before using that as the reason to begin foreclosure proceedings

• Establishing that payments deferred during forbearance cannot be suddenly due in one lump sum and providing homeowners at least three options to avoid losing their home including resuming regular monthly payments and move any missed or suspended payments to the end of the mortgage loan, modify the loan’s length or interest rate or sell the home.

While a forbearance allows for mortgage payments to be delayed for an agreed upon time period, it is not loan forgiveness. Eventually the postponed payments will need to be made up. Lenders and Loan Servicers approach forbearance differently, Babinski says, with some tacking payments on to the end of the loan and others increasing regular monthly payments for a period of time until the forbearance amount is made up.

Both routes can help keep borrowers in their homes or enable them to exit the loan without facing a foreclosure.

“More options have been created in response to COVID-19,” Babinski says. “Before, you would only be able to defer a payment or two, but lenders wouldn’t likely offer a forbearance to this extent. This is helping borrowers hold on to their largest asset.”

2. Borrower circumstances and  attitudes toward their homes have changed

Changes in consumer circumstances and behavior have also played a role in reducing homes at risk for foreclosure. The average homeowner gained $33,400 in equity between Q1 2020 and Q1 2021, according to a report by CoreLogic, which also found that the number of underwater homes decreased by 24% in the same time period.

That wasn’t the scenario in 2008, according to Miller.

“People were using their houses as an ATM. If they needed money for something, they just took it out of their equity. In some cases, they were taking out as much as 100-150% of their home value,” Miller says. “Lending policies are now a lot more conservative, and people aren’t able to put themselves in an over-extended position as easily.”

He says buyers are also more thoughtful in how big of a loan they take on in the first place.

“It seems to me, by working with some of the younger families, that they’re more on top of it than ever,” Miller says. “They are a little more conservative in their purchasing, even if they qualify for more, so I think they may be making better decisions.”

3. The current housing market allows for more exit options

Facing foreclosure is never an easy scenario, but homeowners struggling to make payments have a critical advantage that was in short supply in 2008 – the potential ability to sell their home for a profit.

“We’re in a completely different environment,” Miller says. “We have historically low inventory and high demand which is driving up prices and increasing home equity. A homeowner could sell their home very easily if they needed to get out of a loan they can no longer afford and may be able to pocket some profit to help find alternative housing.”

In fact, Miller argues that the current low inventory is in part a result of the 2008 crisis.

“Builders dramatically slowed building throughout the country coming out of the 2008 crisis, so we got behind on the new-home building inventory. They’ve never caught up,” he says, adding thatsupply shortages caused by the pandemic have made it very difficult even now to try and dramatically increase this new-home building inventory.

Although Babinski understands why some have concerns about another housing crisis, she notes that it’s simply not the same market.

“This market and the circumstances surrounding it are truly different than what they were in 2008,” she says. “Although we will likely see some foreclosures, it’s hard to picture it being remotely close to what it was. The 2008 market crash was a new animal, just as COVID-19 is, but they are two different animals in two completely different climates.”

Get RE/MAX News delivered to your inbox! Sign up for News Alerts in the footer below.