Will There Be a Flood of Post-Pandemic REO Volume?
Plenty of Signs Point to a Healthy Real Estate Market in 2022
by Andrew Oliverson
If there is one word that explains the real estate-owned (REO) market over the last eighteen months, it’s “ambiguity.” Since March of 2020, protections have been in place for homeowners impacted by the COVID-19 pandemic. Under the provisions of the CARES Act, borrowers with a pandemic-related financial hardship and a government-backed mortgage were entitled to up to 12 months of forbearance, allowing qualified homeowners to defer their mortgage payments for up to a year. In the following months, the Federal moratorium on single-family foreclosures and evictions was extended numerous times. While the current moratoriums expired as of July 31, 2021, a number of federal entities have either extended or issued new guidance. The latest Federal Housing Finance Agency (FHFA) extension applicable to evictions is set to expire September 30, 2021, with additional protection against foreclosure for post-COVID defaults put in place by the Consumer Financial Protection Bureau (CFPB) through the end of 2021.
What Have Moratoriums Done to the REO Market?
Overall, moratoriums have accomplished their goal of protecting homeowners affected economically by the pandemic. They have allowed homeowners who may have been unable to pay their mortgage to stay in their homes, preventing mass foreclosures and a potential housing market crash. In fact, the moratoriums may have even strengthened the real estate market by keeping supply tight. According to the Radian Home Price Index (HPI) provided by Radian’s subsidiary Red Bell Real Estate, LLC, the number of existing homes on the market in the spring of 2021 was more than one-third lower than at the same time last year, driving prices up at an annualized rate of 10.7 percent in the first half of 2021. The Federal Reserve cited forbearance programs as a contributing factor to the unusual strength in home prices, finding that “on average, the availability of forbearance during the pandemic increased house price growth by 0.6 percentage points between April and August 2020.”
Prior to the pandemic, foreclosure activity hit a historical low of 0.5 percent—about half the typical foreclosure rate, according to ATTOM Data Solutions. Foreclosures are a natural part of a healthy real estate market, as some folks will overextend, take unnecessary risk or will simply encounter circumstances that won’t allow for payments to continue. Under normal conditions, foreclosures help release supply into the real estate market by way of foreclosure sale or REO listing, which in turn helps regulate prices. However, for more than a year the foreclosure and REO market has been dormant due to the moratoriums. As moratorium deadlines loomed time and again, servicers and REO managers continued to brace for the anticipated influx of volume. Yet, as each deadline approached, the government continued to extend protections as the pandemic evolved. The only thing that is certain is that the protections will end at some point. The question is, what will be the outcome when that finally happens?
Expectations for Post-Pandemic REO
According to the Mortgage Bankers Association, an estimated 1.74 million homeowners were in forbearance plans as of July 18, 2021. The Washington Post reported that “although the percentage of homeowners surveyed [in the Census’s Household Pulse Survey] who were behind on their mortgage has declined from 7.8 percent at its peak in mid-December to 4.7 percent in early July, the share of delinquent homeowners who experienced a loss of income due to unemployment has increased to 14.5 percent.” This is bound to result in some default activity when all protections are fully lifted. However, there are several reasons to believe the foreclosure rate won’t be as high as initially anticipated at the onset of the pandemic.
First, even as the foreclosure moratoriums have been lifted, there are safeguards in place issued by the CFPB. Prior to the end of 2021, guidelines from the CFPB will ensure that only those loans that were in default pre-pandemic or are vacant and abandoned will have the foreclosure processes initiated. The CFPB has made it very clear to servicers that being “unprepared is unacceptable.” It is hard to believe that a servicer would take an aggressive, liberal approach to the guidelines and rush to foreclosure on a loan that doesn’t fit the guideline box exactly. While foreclosure activity can resume as of August 31, it’s unlikely that this resumption will result in a meaningful volume of REO.
As home prices have risen strongly over the past eighteen months, homeowners have gained significant equity. Distressed homeowners will likely be able to sell for a profit when their forbearance period ends, rather than go into foreclosure. And the tremendous market demand from investors and first-time homebuyers will benefit these sellers as well. There are many deep-pocketed investors currently queued up to buy and rehab properties as soon as they hit the market. In addition, the millennial generation’s appetite for homeownership continues to gain momentum.
The National Association of Realtors estimates that there is still a shortage of five million single-family homes, compared to 1.74 million delinquent mortgages. It forecasts that “foreclosed homes coming into the market will not cause a glut and price declines but will help alleviate the tight housing supply and lead to slower price appreciation.” This may be a godsend for many prospective homebuyers who have been edged out of the market over the last year due to low inventory and price appreciation. We are already beginning to see hesitant property sellers coming off the sidelines in anticipation of new inventory coming onto the market as forbearances end. New construction is also ramping up, as supply and labor shortages ease. Housing starts rose 6.3 percent in June to the highest level in three months, according to Commerce Department data.
The bottom line is that it will not be until 2022 or later before we get back to pre-pandemic foreclosure levels, and in the meantime, we should see home price appreciation begin to moderate. As the moratoriums are eased and new inventory comes on the market, sellers may have three offers to choose from rather than thirty, and that’s a positive improvement. For those of us interested in REOs, there probably won’t be a tsunami of supply but instead a moderate increase in volume. Business will return to pre-pandemic levels and the overall economy won’t be dragged down into a real estate-lead recession.
Of course, we’re living in uncertain times and conditions could change in a moment. No one can predict the future with perfect certainty. But there are plenty of signs pointing to a healthy real estate market in the post-pandemic environment.
