As we have reported recently, the rate of improvement in forbearance volumes has plateaued with over 2 million homeowners still 90 or more days past due on their mortgages. At the same time, home prices have been increasing significantly over the past couple of years, and equity levels are near record highs.
This second fact has been of some comfort to those who worry about a foreclosure crisis resulting from the COVID-19 pandemic. Rising home values and hefty equity shares suggest that when all is said and done, many financially stricken borrowers will be able to sell rather than face foreclosure.
But, as the chart below shows, more than one out of every 10 borrowers in forbearance (10.4%) has less than 10% equity in their home, usually enough to cover the costs of selling a home. That’s nearly 290,000 people.
Add in the effect of 12 months of deferred interest during the forbearance period and the share swells to 15.3%, or some 425,000 homeowners. This doesn’t even take into consideration any deferred taxes or insurance which could further impact a borrower’s equity position.
Nearly 20% of FHA/VA mortgages in forbearance have less than 10% equity, although that rises to more than a quarter (26%) when adding in deferred interest. On the other end of the spectrum, less than 5% of GSE forbearances have limited equity, almost 9% including forborne interest payments.
Looking at the states with the highest number of loans in forbearance, we see that nearly two-thirds have higher shares of homeowners in forbearance with less than 10% equity than the national average.
It’s also worth noting that the rate of decline in the number of borrowers 90 or more days past due has been relatively slow (albeit steady) so far. At the current rate of improvement, today’s 2.1 million seriously delinquent mortgages would fall modestly to 1.97 million by the end of March 2021, when the first round of forbearance plans begin to hit their 12-month expirations.
There has been some discussion in Washington of pushing those expirations out to September. Even with such an extension, there would still be 1.66 million seriously delinquent borrowers at that point, given the current rate of improvement. Of course, that rates of improvement could accelerate or decelerate in coming months depending on broader economic factors. In any event, at the current rate of improvement it would take another five years for the number of seriously delinquent mortgages to normalize to pre-pandemic levels.
Roll rate data shows that the inflow of new delinquencies has normalized to pre-pandemic levels. Unfortunately, the same data suggests that past due borrowers are rolling into later stages of delinquency at a higher level. This makes sense, given the forbearance protections currently available.
The question is, what happens to these borrowers next? The most significant unknown in the market right now is what share of them will be able to re-perform on their mortgages through post-forbearance waterfall assistance. That unknown is likely to remain so until a meaningful volume of borrowers have gone through that waterfall process. Only then will we have a clearer picture of the true downstream risk in the market.