The Housing Market and Credit

 

We all know that house prices are increasing while the availability of inventory of houses is shrinking around the country; while at the same time, unemployment remains at a high level with pandemic-related unemployment driving both the economy and political policymaking.

The article below was written by Glen Weinberg of Fairview Commercial Lending, a leading hard money, non-bank lender in residential and commercial investment real estate. Glen can be reached at: info@fairviewlending.com.

10 MILLION AMERICANS …

10 million Americans are behind on their mortgage payments, with the majority of these late payments occurring in FHA loans. At the same time, Millions are out of work, yet house prices are increasing in most markets. What was in the new forbearance agreement? How does a Forbearance impact credit? Why are forbearance agreements the leading driver of increasing house prices?

The White House said that it would extend a ban on home foreclosures for federally backed mortgages through June 30. President Biden had earlier extended the moratorium, which had been set to expire at the end of January, until the end of March in a series of executive actions on his first day in office.

 

BIDEN GIVES EVEN MORE TIME …

The Biden administration also said it would give homeowners more time-through June 30-to enroll in a program to request a pause or a reduction in mortgage payments. The federal Cares Act signed into law last March by former President Donald Trump let borrowers postpone payments on federally backed mortgages for as long as 12 months.

Homeowners will now be able to receive up to six months of additional mortgage payment forbearance, in increments of three months, for those borrowers who entered forbearance before June 30, the White House said. Borrowers who enter into such plans can skip payments if they suffer a pandemic-related hardship but have to make them up later.

In essence, borrowers could refrain from paying a mortgage / making payments for almost two years as the new order allows borrowers up to 6 months of additional forbearance as long as they enter into the agreement before June.

 

WHAT’S FORBEARANCE?

Forbearance is when your mortgage servicer or lender allows you to pause (suspend), or reduce your mortgage payments for a limited period of time while you regain your financial footing. The CARES Act provides many homeowners with the right to have all mortgage payments completely paused for a period of time.

Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and guidance from federal agencies and the GSEs, there are two protections for homeowners with federally or GSE-backed (Fannie Mae or Freddie Mac) or funded mortgages:

• First, your lender or loan servicer may not foreclose on you until at least June 30, 2021. Specifically, the CARES Act and the guidance from the GSEs, the FHA, the VA, and the USDA, prohibit lenders and servicers from beginning a judicial or non-judicial foreclosure against you, or from finalizing a foreclosure judgment or sale. This protection began on March 18, 2020, and now extends through at least June 30, 2021.

• Second, if you experience financial hardship due to the coronavirus pandemic, you have a right to request and obtain a forbearance for up to 180 days. You also have the right to request and obtain an extension for up to another 180 days (for a total of up to 360 days). You must contact your loan servicer to request this forbearance. There will be no additional fees, penalties or additional interest (beyond scheduled amounts) added to your account. You do not need to submit additional documentation to qualify other than your claim to have a pandemic-related financial hardship.

 

MANY LENDERS OFFER RELIEF

Credit card companies, auto lenders, and other lenders are providing similar relief to their clients via forbearance or modification plans. Over 100 million borrowers are in some type of forbearance on an account. About 10 million borrowers have missed mortgage payments.

The Cares act prohibits lenders from reporting the payments as missed payments and therefore loans put into Forbearance do not affect your credit score. Unfortunately, what is happening in the marketplace is drastically different.

Banks have pulled back sharply on lending to U.S. consumers during the coronavirus crisis. One reason: They can’t tell who is creditworthy anymore. By early April, 33% of banks that responded to the Federal Reserve’s senior loan officer survey said they had increased their minimum credit-score requirements for credit cards over the previous three months, up from 14% in January. Bank respondents tightened lending standards for all consumer-loan categories tracked by the survey.

Furthermore, TransUnion recently began selling data to help lenders determine whether consumers have been affected by the pandemic, including data on people who have received a deferment or other assistance. According to the legislation, a forbearance can’t be used to deny credit to someone, but there are loopholes. For example, a lender in their underwriting might require the last 6 months of paystubs, mortgage statements, etc… and use this information to deny the borrower.

 

NOBODY IS TALKING …

Nobody is publicly talking about it, but a forbearance is a red X mark for lenders and will prohibit, in many cases, any additional advance of credit. For example, a bank is not going to give someone a new home loan if their existing mortgage is in forbearance. This is, in essence, keeping borrower’s stuck in their existing houses because without the ability to get a new loan, why would someone sell their existing house?

10 million houses have essentially been taken off the market as the owners are financially stuck as they cannot get new credit. Furthermore, 106 million borrowers are unable to do anything due to the red mark on their credit from the forbearance. Many of these borrowers might have deferred a credit card payment as opposed to their mortgage so the true number of homes off the market is exponentially greater than 10 million.

This drastically reduces inventory and will keep a large quantity of properties off the market for some time. The reduction in inventory in already tight markets will lead to price increases as demand has stayed relatively constant and supply has been constrained further.

A large number of the loans in Forbearance are FHA loans which are low down payment loans focusing on the first time buyer and lower price points. The majority of defaults will occur in FHA loans as we saw during the last recession. The number one driver of default is equity. The more equity is in a property, regardless of other variables, the less likely the property will go into foreclosure. With very little equity in most FHA loans over the last several years there will be a plethora of defaults.

 

THE NEXT QUESTION IS …

The next question is how many of the borrowers in forbearance will ultimately default? Nobody really knows, but if we assume that 40% end up defaulting (the rate we saw in the last recession on subprime loans like FHA) after the forbearance runs out, this will amount to roughly 4 million houses in foreclosure; to put it in perspective in 2008 3.1 million foreclosure filings were made.

This leads to the next question; how will the market react to the large increase in new inventory? The majority of properties entering foreclosure should be at the lower price points where there is a huge demand for houses as building costs have risen faster than incomes making it almost impossible to drastically increase inventory to meet the demand.

In solid markets like Denver or Atlanta the market should be able to absorb this inventory either through end users or corporate housing companies that buy suburban houses for long term rentals.

Continuing forbearances now for over 18 months is merely delaying the impending problem that 10 million plus are experiencing. There have been fundamental changes in the economy and many sectors are not coming back anytime soon if ever. Unfortunately, the economy is not like a light switch will turn on and miraculously everyone gets current again and is able to make up the missed payments.

There is no doubt there will be millions of foreclosures soon (how soon depends on the moratoriums). The only question that is outstanding is how each market will absorb this inventory and what impact there will be on prices. In most cities there will be little impact, but we suspect there will be many markets that will struggle with the inventory leading to market declines. We will get to see how this unfolds sometime later this year.

 

Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.