By Pierre G Villere
Chicken Little. It drives me crazy when down-in-the-mouth pundits try to scare the public with pronouncements about pending doom.
As has been reported in the popular business press, that happened recently. The pronouncement came from no less than the Consumer Financial Protection Bureau, a prominent federal agency charged with protecting the interests of consumers.
In April, they reported there is a tidal wave of distressed homeowners who will need help arising from the expiration of forbearance periods that were put in place at the outbreak of the pandemic and the subsequent shutdown. To stave off a rush of foreclosures, the Coronavirus Aid, Relief, and Economic Security Act prohibited foreclosures of federally backed home mortgages, which make up about half of all residential mortgages.
The Concern. Now the concern is what will happen when this temporary clemency period winds down while many are still struggling financially. Homeowners with federally backed loans were eligible to receive up to 18 months of forbearance, so those who took it early on in the pandemic could see those protections end after September.
The Consumer Financial Protection Bureau reports that could put roughly 1.7 million homeowners at risk of losing their homes. And some worry that we could experience a replay of what happened to the housing market in the Great Recession, which saw the largest number of foreclosures in history as people lost their jobs, discovered their homes were “under water” on a mortgage-balance-to-market-value basis, and simply walked away.
That won’t happen this time.
Today, only 3% of homeowners owe more than their home is worth, compared to about 30% of homes that were under water during the Great Recession. While the COVID-19 pandemic has rocked the economy, the housing market has defied all predictions by remaining strong.
Unlike the last financial crisis, home prices are soaring to new heights, there isn’t a vacant home in sight, and few struggling homeowners have lost their homes to foreclosures. Ironically enough, the high home prices and competitive housing market that have tormented buyers is exactly what will prevent a repeat of what happened during the Great Recession.
Prices. Sky-high prices provide a solid protective cushion for homeowners. Nationally, median home list prices rose 13.7% from February 2020, just before the pandemic began. With home prices at all-time highs, and the nation is in the throes of a historic housing shortage, any homes that go on the market are likely to be snapped up quickly.
So if homeowners can’t make their mortgage payments, they can take another path, one far less painful than foreclosure: sell, often at a hefty profit. And of course, Congress may also continue to extend the forbearance period.
But that doesn’t mean that financially squeezed homeowners are out of the danger zone yet, even if they don’t go through foreclosures. The percentage of homeowners who are seriously behind on mortgage payments or in foreclosure was an astonishing 245% higher in February 2021 than it was in February 2020.
Approximately 8.55% of loans were in forbearance at the height of the crisis in June 2020, but that is down to 4.7% as of April; that percentage has been ticking down steadily as the economy improves. Still, there has never been so many homeowners leaving forbearance at one time, which is why the Consumer Financial Protection Bureau has warned mortgage companies they must be prepared to handle an influx of calls from homeowners in financial distress this fall.
Congress clearly doesn’t want to create a foreclosure crisis, and I am convinced they will mandate soft landings for those in forbearance. And the strong housing market will be here for years to come, assuring those in forbearance that their values will remain strong, so I remain optimistic that another wave of foreclosures won’t materialize.
Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers and acquisitions. He has a career spanning almost five decades, and volunteers his time to educate the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at [email protected]. Follow him on Twitter @allenvillere.