In August – October 2021, months of housing supply is likely to increase by 15% relative to June 2021 levels because of forbearance exits. Additional supply from distressed borrowers could represent between 5% and 26% of sales volume over that period.
Approximately 850,000 borrowers will exit forbearance in August – October 2021, and because of strong price appreciation and very few loans with negative equity, open market sales are a realistic option for the majority of distressed borrowers.
Over the past year, 25% of borrowers exited forbearance without a plan for returning their mortgage to good standing.
With expiration of a broad federal foreclosure moratorium on July 31, hundreds of thousands of U.S. homeowners are expected to exit forbearance in coming months. A significant share of these homeowners will likely end up listing their home for sale, contributing meaningfully to overall inventory levels and allowing homeowners in forbearance to benefit from home price appreciation and use the equity gained for a future down payment, according to a Zillow analysis.
Unlike 2008, when financial conditions and a souring housing market pushed many homeowners into involuntary foreclosure, strong equity growth and a robust sellers market are likely to ensure that even distressed homeowners have more options and the housing market is likely to be insulated from widespread disruption.
The largest wave of forbearance exits is expected in September and October of 2021, and Zillow projects that forbearance exits will lead to an additional 0.40 months of housing supply in August – October of 2021, a 15% increase relative to 2.6 months of supply in June. For context, this additional 0.40 months of supply roughly means an extra 211,700 homes for sale, which would represent 13.1% of all predicted sales over the next three months.
This projection assumes that borrowers exiting forbearance in August – October will behave similarly to borrowers that exited forbearance in the past year, when approximately 25% of borrowers may have listed their homes for sale following their forbearance exit. In a more distressed scenario, where 50% of forbearance exits lead to homes listed for sale — whether by foreclosure or a pre-emptive borrower sale — we project that 0.80 months of housing supply will be added to the market in August – October 2021, representing a 31% increase in months of supply relative to June levels and 26% of expected sales volume in the coming three months. In a positive outlook scenario, where only 10% of borrowers exiting forbearance sell their home, we project that 0.16 months of additional supply will come to market and represent 5% of home sales from August – October 2021.
Low-income borrowers — who often, but not always, use federally backed programs including low down payment loans backed by the Federal Housing Administration (FHA) to help them secure a home — may be particularly vulnerable, with less savings and monthly cash flow to work their way out of forbearance. Atlanta (42,000), Houston (40,000), Chicago (28,000), and Dallas (22,000) have the highest number of borrowers behind on their FHA loans, according to an analysis of FHA data by the American Enterprise Institute. Other areas with high levels of delinquent borrowers include Washington, D.C.; Baltimore; Riverside, Calif.; San Antonio; Fort Worth, Texas; and Philadelphia.
The table below details three forbearance exit scenarios: In the first status quo scenario, 25% of homes that exit forbearance are sold, which is consistent with borrower actions throughout the pandemic. In a second positive outlook scenario, only 10% of forbearance exits lead to homes sold on the open market. In a third, more-distressed scenario, 50% of forbearance exits lead to homes sold on the market, a significant deterioration from current conditions.
Background and Context
Up to this point, the foreclosure moratorium and forbearance programs have worked as intended. More than 14% of all mortgage borrowers have utilized forbearance protections since the programs began, according to Black Knight. And the 8,100 foreclosures recorded in the second quarter of 2021 was the lowest quarterly total since 1999, the earliest year of data collected by the New York Fed. For reference, at the height of the Great Recession between 2008 and 2010, there was an average of more than 450,000 foreclosure notations per quarter. As the economy has improved, participation in these programs has shrunk. In May 2020 — in the midst of Covid-19 economic disruptions — there were almost 4.7 million active forbearance plans according to Black Knight. Over a year later, as of mid-July 2021, about 1.86 million homeowners, or about 3.5% of all borrowers with a mortgage were in forbearance.
Despite the success of the programs, many homeowners are still at risk of foreclosure. While the national delinquency rate has fallen in recent months, 1.55 million mortgages are currently 90 days or more past due on payments, the definition of "seriously delinquent” — about 1.14 million more seriously delinquent borrowers than there were prior to the pandemic. With many borrowers behind on payments, it is expected that hundreds of thousands will have outstanding balances when they exit from forbearance plans at the end of their 18-month terms in the months ahead.
Black Knight estimates that there could be about 1.2 million borrowers exiting forbearance in the second half of 2021, and hundreds of thousands more to follow, with service providers reviewing the largest number of cases and establishing loss mitigation plans with borrowers in September and October.
Demand in the for-sale market is at record highs, and the lowest share of borrowers in a decade are in negative equity, or "underwater" — owing more on their mortgage than their home is worth on the open market, making it very difficult to sell in a standard transaction. Because of this decade-low negative equity, many currently delinquent borrowers could feasibly settle their debts and avoid foreclosure by selling their homes and using accumulated equity to pay off their mortgage.
Roughly 16% of forbearance exits occurred with no loss mitigation plan, according to Mortgage Bankers Association (MBA) survey data on cumulative forbearance exits from June 1, 2020 through July 11, 2021. Borrowers without a plan could potentially be foreclosed on or sell their home on the market, resulting in additional housing supply in both cases. An additional 9% of homes could have also ended up on the market: 7% refinanced or sold their home, with another 2% potentially being short sales — selling for an agreed upon amount that is less than the full amount owed to the lender to extinguish the mortgage. Summing across these categories, we estimate that about 25% of borrowers that exited forbearance may list their home on the market to resolve mortgage debt.
Using the MBA data on forbearance exit plans and the projected forbearance exits from Black Knight, we approximate the number of borrowers who will eventually end up with their home in foreclosure or listed on the market. Our approach is conceptually similar to the methodology used by the National Association of Realtors for projecting the number of homes exiting forbearance that will end up on the market.
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