The penalty-free forbearance periods offered by U.S. lenders are set to end next year. But what will that mean for the 2.5 million American homeowners who have stopped paying their mortgages?
According to economists, there doesn’t seem to be too much to worry about, as whatever happens will likely be nowhere near the influx of foreclosures that the country saw during the Great Recession.
Some homeowners may find themselves in the position to sell. Still, overall, the U.S. housing market has proven to be surprisingly resilient amidst the COVID-19 pandemic, so experts aren’t expecting things to come crashing down.
One major reason for this theory is that home prices have increased significantly during the health crisis. This means that homeowners who can’t pay their mortgages when their forbearance periods end could sell and make a profit rather than have to foreclose. In the end, selling off a house and paying the mortgage (if the homeowner has equity) is a better outcome than having the bank take possession of the property and selling it.
Housing Market Heating Up
Early in the COVID-19 recession, before the unexpected increase in home prices became apparent, there was plenty of concern surrounding the end of forbearance.
But a combination of short supply, record-low mortgage rates and strong demand has sent home prices skyrocketing. In fact, data from the National Association of Realtors (NAR) shows that from October 2019 to October 2020, the median home price increased by 15.5% (to $313,000). This is an all-time high and is the strongest pace since October 2005.
The data also shows that housing market activity in October 2020 grew by 4.3% compared to last month and by 26.6% relative to October 2019. Sales saw a significant dip from March to May this year, but have steadily climbed as the year went on. Lawrence Yun, chief economist at NAR, also pointed out that Americans currently hold a record of $20 trillion in home equity:
“There is a solid buffer for homeowners to easily absorb modest price declines.”
Yun doesn’t foresee any decrease in home prices either. The three reasons he mentions are the high incomes among the bulk of homebuyers, the slower pace of homebuilding since 2008’s financial crisis and the record-low inventory of homes for sale.
Improved Help for Borrowers
Back in March, as the pandemic began to take hold of the U.S., Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act, which offers generous terms for mortgages. As long as borrowers’ loans are held by Fannie Mae or Freddie Mac or issued by the Federal Housing Administration or the U.S. Department of Veterans Affairs, they are eligible to miss up to a year of monthly mortgage payments.
Borrowers can ask for 180 days of forbearance and, once that runs out, they can request an additional 180 days. Homeowners can do this for the remainder of 2020.
About two-thirds of American mortgages qualify for this protection. Additionally, many private lenders decided to offer 180 days of forbearance to the remaining borrowers, who took out jumbo mortgages or non-QM loans that are not covered by the Act.
A significant difference between now and a decade ago is that borrowers won’t be required to pay a lump sum when their payment break ends. They’ll be able to resume monthly payments, and any unpaid balance will be added to the end of the loan, penalty-free.
However, during the Great Recession, borrowers were required to have all of the missed payments covered within six months to a year. Since there were decreasing home values and double-digit unemployment at the time, many of them couldn’t make the payments; therefore, foreclosures flooded the real estate market.
In this current recession, homeowners will be able to sell in a hot housing market to pay off their mortgages, which means their equity and credit scores will remain intact.
Of course, some homeowners will probably not recover enough income, particularly people in harder-hit sectors like travel and hospitality. They will likely have to sell their properties and downsize or become renters. Although these are not ideal individual scenarios, the housing market as a whole should not be impacted that much.
The Ins and Outs of Forbearance
Those who are wondering whether they qualify for forbearance or how to access it should be aware of the following factors. You shouldn’t stop making payments without first talking to your lender or servicer about your need for relief. Luckily, lenders don’t require proof of hardship, so qualifying for forbearance is fairly straightforward.
There are no penalties for missed payments during forbearance, so your credit score won’t be affected, and you won’t have to pay late charges. But keep in mind that you will still owe the money. Forbearance is simply a grace period that pauses your payments and lengthens your loan term.
Despite the challenging economic climate that has resulted from the COVID-19 pandemic, the housing market seems to be faring well. This will be helpful when forbearance periods end. Should homeowners have to sell, the thriving market will make it more profitable than a decade ago.