In June 2020, about 4.3 million homeowners were in mortgage forbearance plans made available after the COVID-19 hit, according to First American Deputy Chief Economist Odeta Kushi. That dropped to 2.3 million a year into the pandemic.
“While this number will likely continue to fall as the labor market rebounds further, concerns remain that the expiration of emergency protections will unleash a flood of foreclosures similar to the Great Recession,” Kushi said in a release. “Yet, our analysis shows that this time, the record levels of equity enjoyed by many homeowners will help limit the number of foreclosures.
“In fact, if distressed homeowners are required to resolve delinquency, involuntary sales, while still distressing for those involved, are much more likely than foreclosures, given the likelihood of significant equity buffers,” Kushi said.
An adverse economic shock may cause a homeowner to become delinquent on mortgage payments and eventually lead to serious delinquency (no payments in the last 90 days), but not every seriously delinquent homeowner will go into foreclosure, Kushi said. Borrowers who have little to no equity are more likely to. Positive house price appreciation increases home equity and helps prevent foreclosure, she said.
“Our analysis shows that in the post-Great Recession period, a 1 percentage point increase in annual house price appreciation resulted in a 0.33 percentage point decline in the transition rate, or 6,700 fewer foreclosures when all other factors remain unchanged,” Kushi said.
“The number of foreclosure starts peaked at nearly 733,000 at the height of the foreclosure crisis in the third quarter of 2009. At the time, house prices had declined by nearly 11 percent compared with a year earlier. Had all other factors remained unchanged in 2009, except annual house price appreciation was replaced with the positive 11 percent year-over-year rate from the fourth quarter of 2020, there would have been 34 percent fewer foreclosure starts, according to our analysis,” she said. “Over 249,000 foreclosure starts may have been prevented in that quarter alone. With enough equity, a homeowner has the option of selling the home, an option that doesn’t exist for a homeowner in a negative equity position.”