Forbearance ….that’s the new popular term in real estate and mortgage industry since the COVID-19 pandemic. Essentially it is the mortgage lender temporally allows the borrow to pause the monthly payment. The unpaid balance will need to be paid on a later date.
It certainly has been a tough year for many people as millions of lives were affected by the pandemic. It is estimated that there are currently 4 million homes in forbearance in the United States. That’s more than the 3.8 million homes in foreclosures between 2007 and 2010 – during the Great Recession.
The logical question is ….are we going to see all these forbearance turn into foreclosures? In my opinion? Not likely…Why? Here are a few reasons why a wave of foreclosure may not becoming.
A. Home Equity is at an all-time high – Of all the people in active forbearance, 90% of them have at least 10% equity and 77% of them have at least 20% equity in their homes. Even if these people connote to experience hardship and are forced to sell, most will have plenty of equity to allow them to sell regularly – avoiding a short sale or foreclosure.
B. Forbearance exit options – Upon exiting forbearance, homeowner can negotiate a payment pay to pay back the missed mortgage payment or defer the payment to the back end of their loan. Essentially extending the length of their mortgage by a year. These people may never need to sell their home.
C. Continue appreciation – With about 10% of the homeowners in forbearance with less than 10% equity, these are the venerable ones that may become a distressed sale if they continue to experience hardship. That amounts to a total of 400,000 homeowners in the entire. Not all 100% of these people will suffer this fate. Also, with home value continue to rise, their equity position will improve as well.
Knowing these facts and numbers tells us that while some will not be able to avoid a foreclosure or short sale, it probably is going to be more of a ripple than a wave in the market.
So here is the bottom line: DO NOT count on a wave of foreclosures or short sales due to the COVID-19 recession. Things may be a bit more distressed in 2021 after all the forbearance expires, but it will be nothing compared to the real estate meltdown of 2008. Nobody should expect any type of a deal anytime soon especially with the rate dipped below 3% – another record low.
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