Is the U.S. mortgage industry about to fall off a cliff?
Forbearance programs permitting temporary suspension of Americans’ monthly mortgage payments have been a godsend to the more than 4 million borrowers who have made use of them in the time of COVID-19. But the end of this much needed grace period is looming large.
Carol Faber, Partner and Co-Chair of the Distressed Property Practice at Akerman Law, has been through several downturns in her 35-year career. For Faber, it’s important to acknowledge that despite being five months into the COVID-19 crisis, the real estate cycle is still in the early stages of reacting to it.
“No one really knows how long this is going to last,” she says. “I find myself repeating constantly that we are still in the early innings of this – even though we are five months in.” So far, Faber explains, neither lenders nor landlords have been able to enforce their rights, which has prevented the kind of dramatic mass-eviction scenario many tenants’ rights groups are fearing.
The most important element in any sort of resolution will likely to be how the next phase of relief measures plays out. Faber does not anticipate government measures prohibiting foreclosures and evictions to expire according to their current schedules.
“I don’t know that these programs are going away,” she says. “I think that Congress is going to re-up some of those programs so they won’t go away so fast. I don’t think they can let everything go into freefall. I don’t see how they cannot continue funding some of these programs – there is just too much demand for it right now.”
Mortgage forbearance programs for borrowers with federally backed mortgages were scheduled to run until June 30, but that ending date has already been moved back to August 31.
Once the government programs have run their course, Faber expects to see more foreclosures, sales of distressed properties, and perhaps a rude awakening regarding the value of loan portfolios.
“Currently there is a disconnect between what people think their loan portfolios are worth and what buyers think they’re worth. We’re going to see more determination of what the values are right now. It’s hard to underwrite properties right now,” she says.
Faber feels that the timelines attached to the government’s many support vehicles, reflective as they are of a long-since extinguished optimism around the federal government’s ability to manage the crisis, will need to change.
“I think the hope was that we’d be further along in the pandemic, that we’d be opening up [the economy], which would lend itself to ramping down some of these programs,” she says. “But people and institutions and companies are still in need of these programs, and the government will continue to fund them.”
As government programs extend into August, Kenon Chen, Clear Capital’s executive vice president of corporate strategy, is keeping a watchful eye on both foreclosures and forbearance numbers, noting that the default rate already climbed from two percent, 7.76 percent in May.
“It’s concerning,” Chen says. “Once the moratorium is lifted there could be an impact. There are going to be loans that need decisions and [we will have ] to ascertain the value and conditions of these properties.”
Chen is taking a wait and see approach, while also emphasizing the need for lenders and originators to be armed and ready with information if a wave of defaults hits.
“We are seeing some recovery in housing, and the question remains what will it look like in fall and for the rest of the year? It’s difficult to predict. The one thing I think is clear is that in order to reduce risk, the need for low cost data and analytics is paramount to give lenders the opportunity to make good decisions,” he says.