Is a Foreclosure Surge Coming in the U.S.?

One in 5 tenants with children in the U.S. are currently behind on rent payments. The concern that the eviction crisis will worsen once COVID-era renter protections are scaled back or removed is completely warranted.

At the same time, there has been less discussion of a possible foreclosure crisis. Are homeowners at risk of displacement too? And if so, is it at the same scale as renters?

Recent reports by the real estate analysis firm ATTOM Data Solutions find foreclosures increasing of late, with month over month bumps in foreclosure filings during both February and March 2021. March’s increase, with 11,880 filings, was 5% over February. Yet these figures can be misleading: March’s rate was 75% lower in comparison to the same time last year, at the onset of the pandemic.

Homeowner Protections during the COVID-19 Pandemic

Much of the overall decline in foreclosure activities during the pandemic can be attributed to the federal foreclosure moratorium included in the CARES Act, signed into law on March 27, 2020. The moratorium barred lenders from initiating foreclosure proceedings on loans insured by the Federal Housing Administration , the U.S. Department of Agriculture, and the Department of Veterans Affairs.

This legislation also gives homeowners facing COVID-related financial difficulties the right to request a forbearance plan of up to 180 days. Under a forbearance plan, the lender works with the homeowner, allowing a pause in payments or reduced payments, though not debt cancellation. As the foreclosure ban was recently extended by the Biden administration through June 30, 2021, struggling homeowners who entered into a forbearance agreement with their lender prior to June 30, 2020 are now eligible for an additional six months of relief.

There’s a major gap in these protections, however: the federal moratorium doesn’t cover homeowners with privately-backed mortgages. According to the National Housing Law Project, about 30% of U.S. mortgages, encompassing roughly 14.5 million households, are privately owned. And most states did not enact any local foreclosure protections that would further protect homeowners with privately backed mortgages. In states that did, such as New York, Massachusetts, and Florida, many of these policies have expired and court proceedings resumed.

The Outlook for a Foreclosure Surge is Unclear

So will the end of the federal moratorium, whenever that occurs, result in a surge of foreclosures? Given the number of factors at play, including unemployment trends and the housing market, it’s hard to predict.

A positive sign is that the percentage of loans in forbearance continues to decline, and that number is well below the rate at the pandemic’s onset. Just prior to the crisis, low unemployment and a sustained period of high economic growth contributed to a 0.25% forbearance level as late as March 2, 2020. But by April 1, 2020, as the economic impact of the pandemic manifested, that proportion rose to 2.66% and lenders saw a 2,000% jump in forbearance requests.

Levels reached a peak in early June 2020, when 8.55% of all active mortgages were in some type of forbearance program—either government-led or private. Recently, at the end of March 2021, this number had declined to 4.90%, involving 2.5 million homeowners, and new forbearance requests reached their lowest level since the beginning of the crisis.

Foreclosure trends will soon significantly depend on homeowners’ ability to catch up financially once their forbearance plan expires. Typical options include making a full, one-time repayment (lump sum), making additional payments on top of a regular monthly payment, modifying the loan terms, or selling the home to pay off the loan.

While the unemployment rate dropped to 6.0% in March 2021, it remains almost double pre-pandemic levels. And unemployment has impacted some industries, and some locations, more than others. Cities heavily dependent on tourism and services sectors, such as Las Vegas and Orlando, where homeowners may be less able to meet their loan burdens after forbearance, could be more susceptible to a rise in foreclosures. Yet there is little expectation that a foreclosure ‘surge’ could reach the crisis seen during the Great Recession in 2008. Unlike now, a lax regulatory environment and high levels of predatory, private lending contributed to record amounts of housing loss in 2008—over 3 million foreclosure filings.

The current rise in home sale prices, due to short supply and steep demand, could both help and harm owners facing foreclosure. Increased prices may make it easier for a homeowner with equity to sell on favorable terms and pay back their loan. While examining available sales data, however, it is not possible to know how many homes are being sold to avoid potential foreclosure nor how many post-forbearance sales are made under duress. At the same time, current trends also mean that homeowners who do sell will be left trying to purchase a new home in an overheated market.

Finally, private equity, both from large investment companies and individual investors, is now a major player in the U.S. residential real estate market. In 2018, private equity accounted for 11% of home purchases, double the level prior to 2008. Cash sales are now very common, often leaving prospective buyers with strong financial credentials and mortgage pre-approvals unable to compete. A surge in foreclosures could increase the number of single family properties not owned by a resident homeowner.

What about Landlord Homeowners and their Tenants?

The impact of the federal eviction moratorium and foregone rent payments on landlords, especially ‘mom-and-pop’ small investors, increases the risk of foreclosure on rental properties. Individual investors own about 77% of small (2-4 unit) apartment buildings, and these units typically rent for less than single-family homes or similar units in medium-size or large apartment complexes. In many urban areas, such as Washington D.C., these residential properties are an important source of affordable housing for lower-income renters.

Such landlords tend to have lower incomes themselves, especially in comparison to those who own single-family homes or larger apartment buildings. The group also includes the largest share of Black and Hispanic investor-owners. About 34% of these landlords are retired and rent payments are their only source of income. Like their tenants, such property owners are experiencing the negative impact of the pandemic and may have little economic resiliency to withstand the loss of income from months of past-due rent.

With the creation of the Emergency Rental Assistance Program in January 2021, small-unit landlords can apply for assistance on behalf of their tenants in order to cover current or back rent. The application requires the permission of the renter and up to 12 months of assistance is available, although it’s too soon to know if this policy is successfully averting small investor foreclosures.

But if there are substantial foreclosures of multi-tenant rental properties, affected renters are sure to face great difficulty finding replacement housing at a similar price. In areas that are gentrifying, especially, older, small apartment buildings are likely to be razed and replaced with more expensive units backed by private investment, further reducing the affordable housing inventory.

So What can be Done?

A near-term increase in foreclosures is most likely to involve two groups: first, single family homeowners with privately-backed mortgages still experiencing COVID-related economic hardship; and second, owners of small-unit rental buildings with struggling tenants.

State or local legislation to enact or strengthen forbearance opportunities for homeowners with private mortgages can help to close the obvious hole in federal protections. And requiring lenders to enter into mediation with COVID-impacted borrowers before taking action in court could also reduce the likelihood of foreclosure.

Locally-led programs to increase awareness among small landlords of the Emergency Rental Assistance Program and eviction diversion programs, and to coordinate applications between them and their tenants, may help bring financial assistance to both the renter and landlord, and avoid both tenant displacement and the potential loss of affordable housing inventory.

Though the possibility of a surge in foreclosures receives less attention than a looming eviction crisis, it should not be overlooked. There is a gap in protections that can impact vulnerable groups. Lenders, housing advocates, and all levels of government must ensure that proper support is in place, both as the pandemic continues and during a return to normalcy.