Covid-19 mortgage bailouts decline slightly, but a new foreclosure crisis could be brewing

After a substantial decline last week, the number of borrowers in coronavirus-related mortgage bailout programs dropped by a lot less this week.

It’s a signal that homeowners still need a lot more help in order to recover from the ongoing economic ills of the pandemic. There are also indications that a new foreclosure crisis could be on the horizon.

As of this week, 3.7 million borrowers are still in government and private sector mortgage forbearance programs. That’s about 7% of all active mortgages, according to Black Knight, a mortgage technology and data firm. These plans allow borrowers to delay monthly payments for at least three months and, in some cases, up to a year.

More than 2 million forbearance plans are set to expire this month, and so far about 350,000 borrowers have started making their monthly payments again.

On the other hand, about three-quarters of those still in bailout plans, delaying their payments and sinking deeper into debt, are now in renewals. They have extended their plans by another three months. These borrowers are likely unemployed or receiving reduced income due to the pandemic.

About 48,000 borrowers started their first forbearance plans this month, which is the lowest level since the bailouts began. So while some of the numbers are improving, the forecasts for foreclosures are deteriorating.

The number of seriously delinquent mortgages, those that are at least 90 days past due, more than doubled from May to June. The figure hit its highest level in more than five years, according to CoreLogic. Barring further government support, experts there predict serious delinquencies could double again by early 2022, which could seriously hurt home prices and home equity.

“Forbearance has been an important tool to help many homeowners through financial stress due to the pandemic,” said Frank Martell, president and CEO of CoreLogic. “While federal and state governments work toward additional economic support, we expect serious delinquencies will continue to rise — particularly among lower-income households, small business owners and employees within sectors like tourism that have been hard hit by the pandemic.”

During the last foreclosure crisis a decade ago, close to 10 million Americans lost their homes, either through foreclosure or bank-approved short sales. The housing market is still recovering from that. This time around, the numbers are likely to be much smaller, as the overall market is much healthier. Borrowers have significantly more equity in their homes, unlike a decade ago, when home prices plummeted and millions were left underwater on their home loans, owing more than the homes were worth.

The serious mortgage delinquency rate in June was triple what it was in March and is expected to move much higher, but not all of those borrowers are destined to lose their homes in foreclosure.

“While some would go into foreclosure proceedings, many would sell rather than lose all the home equity that they had gained through appreciation over the last several years,” said Frank Nothaft, chief economist at CoreLogic. 

Foreclosure filings are currently still historically low, but they did jump 11% from July to August according to Attom Data Solutions, as various state and federal moratoria on foreclosures lifted.

“Several states – including Florida and New York – that have had foreclosure moratoria in place have recently loosened some of their restrictions, which may explain the unexpected bump in the monthly numbers,” said Rick Sharga, executive vice president at RealtyTrac, a subsidiary of Attom. “Many courthouses across the country have been closed or have had their caseloads dramatically reduced during the pandemic. It will be interesting to see if foreclosure starts continue to increase as these courthouses begin to re-open.”