The Perfect Storm Will Bring a Wave of Foreclosures
By: Grant Moon
Tags: Forclosure, Housing, Housing Market, Mortgage Services, Mortgage Lending

A perfect storm is a meteorological phenomenon that happens when a rare combination of occurrences collide to produce a historically relevant and catastrophic weather event. The most well-known perfect storm is the one that sank the fishing vessel, Andrea Gail, with her crew in the Atlantic in 1991.

That perfect storm was born when Hurricane Grace converged with a massive low-pressure system, producing up to 100-foot waves that caused disastrous flooding and damage from Newfoundland to Jamaica. Meteorologists accurately forecast the event based on data and weather models. Similarly, we can predict an upcoming wave of foreclosures as the unintended impact of well-intended governmental policy collides with pandemic related economic conditions.

The Calm Before the Storm

The housing sector has outperformed all other sectors of our U.S. economy this year, shining like a bright sun before the clouds move in. Many industry insiders believe housing has had a full recovery, and it’s hard to argue that point when you look at all the records set and broken this year.

Existing home sales were at a 14-year high despite a nationwide shortage of inventory. Low interest rates and inventory combined with demographic shifts and steady demand led to a record $620 billion of equity gains in Q2 or a 6.6% growth year over year. This bump in equity averages out to about $9,800 per homeowner, which has undoubtedly helped mitigate the other not-so-good economic impacts of the pandemic.

Low-interest rates also fueled a historic refinance boom that had lenders scrambling to keep up with demand. In Q2 and Q3 of this year, refinances were up more than 200% from the same time the year before. Most of that volume was made up of interest rate and term refinances, but cashouts moved $44.6 million in equity to cash for homeowners. These housing statistics look good in isolation, but they don’t tell the whole story.

The Perfect Storm

Nationwide unemployment has been trending lower, but overall jobless claims remain high. Many jobs that were temporarily furloughed now appear to be gone forever, and the number of long-term unemployed workers keeps rising. This trend is likely due to job seekers giving up the search because of sparse employment opportunities or needing to stay home and care for children not in the classroom.

The one time Economic Impact Payments given to households this summer helped, but for people who were already on unsteady footing before the pandemic, it wasn’t enough. Moreover, unemployment benefits are coming to an end.

The additional benefit payment provided in the CARES Act expired at the end of July. Now the extended unemployment benefits that start once state benefits run out will terminate on December 26th. Analysts expect lawmakers to pass another stimulus bill eventually, but the wait has already been too long for many.

If we look deeper into housing, things are equally concerning. According to a survey completed by the US Census Bureau, 5.8 million adults say they are likely to face eviction or foreclosure in the next two months. The same survey revealed that 17.8 million adults are behind on rent or mortgage payments.

The November 23rd Mortgage Bankers Association’s (MBA) weekly Forbearance and Call Volume Survey shows the total number of homeowners in forbearance increased for the first time since June, rising slightly from 5.47% to 5.48% of servicer portfolios.

Some borrowers, specifically those with FHA and VA loans, have a much higher rate of forbearance. Currently, 10.76% of FHA and VA loans are either 90-days past due or in the process of foreclosure. Nationwide, the 90-day and over delinquency rate is at its highest level since the subprime mortgage crisis.

The forbearance provisions in the CARES Act allow borrowers with a federally backed mortgage to request up to two 180-day forbearance periods to suspend their home-loan payments without penalties. Most mortgages in forbearance are in the second, or extension, period.

Many borrowers who have exited forbearance have entered a deferral plan and will make up the missed payment amounts at the end of the loan. While exiting forbearance is the goal, the fact that these homeowners deferred the outstanding amount points toward the fact that they don’t have the ability or desire to catch back up entirely now.

According to the US Census Bureau, 17.8 million people are behind on rent or mortgage payments.

The Unmanageable Wave

The question is, what will happen as we reach the end of the second forbearance period? The CARES Act helped millions of Americans remain in their homes, but it also produced artificial constraints that could lead to unintended consequences.

Just like a seawall holding back a monster storm surge, the CARES Act has held back the rising tide of delinquencies and foreclosures. Think about it. If natural market conditions would have prevailed, we’d have homes in various stages of the foreclosure cycle. Servicers would handle the ebb and flow of requests and loan modifications. Local housing markets and home values would remain in equilibrium as distressed properties trickled in.

But like a coastal seawall succumbing to a big storm, the artificial barrier created by the CARES Act will eventually yield. Then we will be facing an unmanageable wave that could drown the housing market.

Smart Money is Ready

If you sit back and observe, you can already see the wave coming. Trustee sales of homes that have been in default for two months or more have quadrupled in one California town. Back in April of this year, The Wall Street Journal wrote that “a growing number of property investors are preparing for what they believe could be a once-in-a-generation opportunity to buy distressed real-estate assets at bargain prices.” The smart money is poised and ready.

Opendoor recently announced plans to go public through a reverse merger into a SPAC, or special purpose acquisition company. This deal gives Opendoor a significant influx of cash to have on hand for the inevitable wave.

Offerpad, another iBuyer who currently extends cash offers for properties in more than 800 U.S. cities, took on Series C funding in 2019. This summer, they rolled out their new Real Estate Solutions Center, making it easier for home sellers to submit their property for an instant offer.

Likewise, Zillow recently moved into the home buying business, essentially declaring war on real estate agents by squeezing them out of the market. Zillow’s shares just hit a record high as analysts lifted their price targets. According to Barron’s, analysts and investors are bullish about “Zillow’s focus on buying, repairing, and selling houses.”

And this sentiment makes sense. With immediate offers and fast cash, iBuyers are uniquely poised to help struggling homeowners get out of foreclosure. They can quickly liquidate REOs too.

We’ve got a perfect storm forecast to make landfall. The skies are darkening, the wind is picking up, and the rain is starting to fall. “She’s comin’ on boys, and she’s comin’ on strong!” Those were the final words radioed by Andrea Gale’s Captain as a perfect storm brought her down.