Mortgage forbearance is about to end for millions of Americans. Here’s why that’s good news for home buyers
Pandemic relief is set to run out for over 1 million Americans in the coming months, which means that many homes could be listed for sale, according to a new report.
When the COVID-19 crisis began in the spring of 2020, federal regulators and lawmakers quickly acted to provide relief to homeowners who suddenly found themselves in no position to afford their monthly mortgage payments.
Homeowners were initially allowed to request up to 12 months of forbearance on their home loans, during which time they could stop making their monthly payments entirely. The program was extended a few times over the course of the pandemic.
Today, an estimated 1.7 million homeowners are in forbearance plans, according to recent data from the Mortgage Bankers Association. And now, barring any last-minute policy changes, most of these homeowners will be forced to exit these programs.
A new report from Zillow Z,
Over the past year, Zillow calculates that roughly 25% of borrowers listed their property for sale following their exit from forbearance.
“Unlike 2008, when financial conditions and a souring housing market pushed many homeowners into involuntary foreclosure, strong equity growth and a robust sellers’ market are likely to ensure that even distressed homeowners have more options,” the Zillow researchers wrote. In other words, a homeowner who exits forbearance but is still in such financial straits that they can’t afford to resume their mortgage payments could manage to sell their home, given the strength of the housing market.
The end of payment relief for mortgage borrowers will create new housing inventory
Based on that logic and what’s occurred previously, Zillow projects that the wave of people exiting their mortgage relief programs will create an additional 0.4 months of housing supply from August through October, which would represent a 15% increase relative to the inventory of homes for sale as of June. That 0.4-months’ supply equates to an additional 211,700 homes going on the market, based on Zillow’s estimates.
There’s a chance though that the homeowners who are still in forbearance now could be in more financial distress than those who previously exited forbearance. In such a scenario, if half of those who leave forbearance are forced to sell, that would add double the inventory to the market.
The researchers at Zillow argued that this chain of events isn’t likely to cause disruption to the housing market. But that could depend on how concentrated these homeowners are from a regional perspective. Homeowners who are still in forbearance are much more likely to have loans backed by the Federal Housing Administration, rather than mortgages backed by Fannie Mae FNMA,
Some markets across the country have much higher concentrations of FHA mortgage borrowers than others — and, therefore, more exposure to this potential fallout from the end of forbearance. A recent study from the American Enterprise Institute, a conservative think-tank based in Washington, D.C., found that Atlanta had the highest share of FHA loans in distress, followed by Houston and Chicago.
“As a result, a buyer’s market could develop in ZIP codes with heavy exposure to such borrowers,” the AEI researchers wrote in the report, because the wave of homes coming on the market could be large enough to shift the tides in favor of home buyers.
Such a chain of events could change the calculus for distressed homeowners in those areas. If a homeowner cannot expect to turn a profit from the sale of their home, they may not be as inclined to sell to avoid financial disaster since the sale wouldn’t generate the income needed to secure a more affordable home or new rental housing. Faced with such a choice, some mortgage borrowers could opt to face foreclosure if it means keeping a roof over their heads for longer.
