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Waning Forbearance and Foreclosure Relief Are On a Collision Course

With forbearance and foreclosure relief winding down, tough decisions for delinquent homeowners may create opportunity for homebuyers.

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With the foreclosure moratorium ending on July 31 and the number of mortgages in forbearance on a steady decline, the housing market is on a collision course that may result in more homes going up for sale.

This increase in inventory may ease home prices and competition that have been sky-rocketing due to short supply. However, it comes on the backs of homeowners struggling to keep up with mortgage payments -- many of whom are disadvantaged by the pandemic and other ways.

Forbearance vs foreclosure moratorium

After being extended for “one final month,” the COVID-related foreclosure moratorium is set to expire in two weeks. This grace period prevents foreclosures on homes with government-backed mortgages. That includes VA, USDA, and FHA loans, in addition to conventional loans backed by Government-Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac.

Alongside the end of foreclosure moratorium, the number of loans in forbearance has been decreasing for 19 straight weeks. Forbearance is a temporary pause or reduction in mortgage payments.

Forbearance plans for government-backed loans initially opened in March 2020 to anyone experiencing pandemic-related financial hardships. Although the typical plan lasts 3-6 months, some plans can be extended for up to 18 months.

An 18-month plan that began in March 2020 would expire in September 2021, leaving the borrower -- whether they are financially ready or not -- to resume making payments with no protection from foreclosure.

According to the Mortgage Bankers Association (MBA), loans in forbearance made up just 3.76% of all loans in July 2021. That’s down from the pandemic-high point of 8.55% in June 2020.

However, that doesn’t necessarily mean that the homeowners exiting forbearance are prepared to resume payments. The MBA also cited a week-over-week increase in the delinquency rate for borrowers that have left forbearance.

Delinquency among FHA borrowers

The delinquency rate is especially high among FHA borrowers, which tend to be low income, first-time homebuyers, and people of color.

According to an analysis from the American Enterprise Institute, of the 7.6 million FHA loans active in May, 14.7% were delinquent and 10.5% were seriously delinquent -- meaning 90 days past due. These figures include loans in forbearance.

The metro areas with the highest rate of seriously delinquent FHA loans include:

Metro AreaActive FHA loansFHA loans in serious delinquency
Atlanta-Sandy Springs -Alpharetta, GA242,32812.8%
Houston-The Woodlands-Sugar Land, TX213,89213.8%
Chicago-Naperville-Evanston, IL150,89414.6%
Washington-Arlington-Alexandria, DC-VA-MD-WV107,84014.5%
Baltimore-Columbia-Towson, MD102,95812.8%

When delinquent borrowers exit forbearance, they’ll either need to resume making house payments or enter into delinquency resolution. Through delinquency resolution, they may be able to modify the loan to reduce payments. But if borrowers can't reach a sustainable payment plan, they will face selling their homes or losing them to foreclosure.

As more loans come out of forbearance without the safety net of foreclosure moratorium, some will inevitably be put up for sale either by owner or through foreclosure.

The question becomes whether this influx of inventory will be enough to tie a weight on soaring home prices. Distressed sales are nothing to be happy about, but the silver lining is that there will be buyers lined up to take a house off of struggling homeowners’ hands.

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