COVID-19 Forbearance Plans and Residential Defaults
What will happen when the plans end, and what opportunities does the situation provide for investors?
Not wanting to repeat the number of foreclosures during the previous financial crisis, both federal and state governments placed moratoriums on residential foreclosures across the country. To keep borrowers in their homes, foreclosures were stopped and new forbearance plans were created.
How the Plans Work
Under the Federal Cares Act, a borrower wanting a forbearance plan can contact their mortgage servicer affirming a financial hardship, and the servicer must put the borrower in a forbearance plan. This relief is available to any borrower who has a federally backed mortgage, regardless of delinquency status. No documentation is required to prove the financial hardship beyond the borrower asserting they are suffering from a financial hardship. The original term of the forbearance is usually 3-6 months and can be extended up to 12 months.
The forbearance agreement allows borrowers experiencing a temporary hardship to make a reduced mortgage payment or no mortgage payment at all during the plan’s term. During the forbearance period, the mortgage servicer will not place the borrower in foreclosure and will not collect any late payment penalties. The borrower must pay back missed payments after the forbearance period ends. Mortgage servicers then will evaluate borrowers for repayment options, if qualified, or the loans will be referred to foreclosure.
Impact on Foreclosures
Once the Covid-19 forbearance plans began in mid-March, borrowers called their mortgage servicers in record numbers to reduce or eliminate their monthly mortgage payments. In March, this caused the national delinquency rate to double to the largest single monthly increase ever recorded. Approximately 3.6 million homeowners were past due on their mortgages (including those already in foreclosure), which is the highest number since January 2015.
As of the end of May, approximately 4.2 million homeowners had entered a COVID-19 forbearance plan. About 26,000 loans entered forbearance plans per day, with the daily number decreasing in May and June. It is expected by the end of June or early July, the number will increase to over 5 million borrowers in Covid-19 forbearance plans.
In addition to the forbearance plans, the moratorium on foreclosures was extended through June 30, 2020. Once the foreclosures restart, what will happen?
Delinquency and foreclosure rates were at a generational low in February 2020 as the U.S. unemployment rate matched a 50-year low. Due to COVID-19, the foreclosure rate will significantly increase, most likely not to the level of 2008-2014, but to a level consistent with the unemployment rate of borrowers. The results will be highly dependent on the number of borrowers who are able to return to the workplace at approximately the same wage, allowing them to enter a repayment option or to take advantage of any additional government intervention assisting homeowners that may be offered.
In CoreLogic’s Loan Performance Insights report released in May 2020, Dr. Frank Nothaft, the chief economist for CoreLogic said, “The pandemic-induced closure of nonessential businesses caused the April unemployment rate to spike to its highest level in 80 years and will lead to a rise in delinquency and foreclosure. By the second half of 2021, we estimate a fourfold increase in the serious delinquency rate, barring additional policy efforts to assist borrowers in financial distress.”
In that same CoreLogic report, Frank Martell, president and CEO of CoreLogic, said: “After a long period of decline, we are likely to see steady waves of delinquencies throughout the rest of 2020 and into 2021. The pandemic and its impact on national employment is unfolding on a scale and at a speed never before experienced and without historical precedent. The next six months will provide important clues on whether public and private sector countermeasures—current and future—will soften the blow and help us avoid the protracted, widespread foreclosures and delinquencies experienced in the Great Recession.”
Foreclosure may be inevitable for borrowers who remain in forbearance plans for 12 months and remain unemployed. Loans that were already over 31 days past due at the time of the COVID-19 forbearance plans may not be able to take advantage of the same repayment options as those who were current before COVID-19, causing more foreclosures. The economic restart of the country that allows the borrowers to enter the workforce will be the determining factor.
Investor Opportunity
With defaults increasing and the potential for foreclosures to increase at the termination of the forbearance plans, a significant increase of foreclosures is expected by March 2021—a year after the first borrowers were placed in forbearance. Borrowers will be looking for viable options for the sale of their homes to keep them out of foreclosure. This will lead to investors having many opportunities to buy residential properties directly from the borrowers.
If investors are unable to buy directly from borrowers, another avenue for the purchase of the distressed properties is through the foreclosure sale process. Both judicial and nonjudicial states allow investors to purchase at the foreclosure sales.
Each state and county may have their own process for purchasing properties. Check with the specific state or county in which the property is located for their processes. Some may hold inperson foreclosure sales; many have moved to online auctions. The websites of the online auction vendors provide very good information; for example, some include the step-by-step process for bidding at a foreclosure sale. The websites list the properties set for auction along with the date and time of the auction. Companies with online auctions include Auction.com, Foreclosure Action Servicer-Altisource, Hudson & Marshall, Xome, Hubzu and Williams & Williams. With the forbearance plans ending in the first quarter of 2021, there will be a dramatic increase in defaulted loans moving to foreclosure. Investors interested in residential properties will be able to add to their portfolio by being ready with helpful solutions for distressed homeowners and by having the cash liquidity to purchase properties at foreclosure sales.
