Dec. 14, 2022
After a two-year lull, the U.S. foreclosure rate is surging. According to the real estate data firm ATTOM, foreclosure filings have increased 167 percent from last year, nearly reaching pre-pandemic levels. Foreclosure filings are the first stage in the process of a lender repossessing a home for failure to make mortgage payments, and a key indicator of housing insecurity.
This rapid increase must be evaluated within the context of pandemic era homeowner protections, a strong housing market characterized by rising prices, and recent inflationary pressures.
An End to Pandemic Protections for Homeowners
Covid-era foreclosure protections went into effect on March 27, 2020, via the federal foreclosure moratorium included in the CARES Act. The legislation barred lenders from initiating foreclosure proceedings on government-insured loans issued by the Federal Housing Administration, the U.S. Department of Agriculture, and the Department of Veterans Affairs. Homeowners with COVID-related financial difficulties could also request a forbearance plan, creating an initial pause in payment, for up to 180 days. Eligible borrowers could extend their forbearance for up to 18 months from the date of initial filing. Excluded from the CARES Act were privately owned mortgages, which account for about 30 percent of U.S. mortgages, or approximately 14.5 million households.
Few jurisdictions kept foreclosure protections in place beyond the expiration of the CARES Act on July 31, 2021, and most have now lapsed. Currently only one state, Vermont, has a foreclosure protection still in place. The Vermont Homeowner Assistance Program (HAP), launched in January 2022, allows homeowners to request a stay of foreclosure activity if they have submitted a HAP application for federal funds. In the recent ATTOM report, Vermont had the lowest foreclosure filing rate in the country.
Did the Pandemic Protections Work?
While the 167 percent year-over-year increase represents a sharp rise in the foreclosure filing rate, it must be placed within the context of an artificially low “foreclosure environment” following passage of the CARES Act. The number of single-family homes entering foreclosure in June 2020 decreased by 85 percent when compared to the same month in 2019, before the pandemic. Indeed, in the first quarter following passage of the Act (Q2 2020), filings plunged to their lowest level since 2005.
The stark decrease suggests that foreclosure protections achieved their goal of keeping many borrowers in their homes during the pandemic. A report by the Government Accounting Office (GAO) found the use of forbearance peaked at 3.4 million mortgages in May 2020, representing about 7 percent of all single-family housing loans.
The GAO report also found that Black and Hispanic borrowers used forbearance at twice the rate of white mortgage holders. Though only 18 percent of the total population of mortgage borrowers identify as Black or Hisplanic, they represented 33 percent of homeowners in forbearance or other payment management programs. This reflects the overall vulnerability of first-time, minority, and low-to-moderate income borrowers to mortgage default, as well as the disparate impacts of the Covid pandemic.
The pandemic exacerbated existing racial and ethnic disparities, increasing the vulnerability to housing loss in minority communities. During the pandemic unemployment rates peaked at 18.5 percent for Blacks and 16.7 percent for Hispanics, compared to 14.1 percent for whites. Data from the U.S. Census Bureau’s weekly Household Pulse Survey showed that these unemployment disparities translated into missed mortgage payments. For instance, 36.3 percent of Black households and 23.9 percent of Hispanic households with earnings losses said that they either did not pay their mortgage or deferred their mortgage, compared with 19.4 percent for white households.
Is a Foreclosure Crisis Coming?
With the sudden increase in foreclosure filings, should we fear a repeat of last decade’s foreclosure crisis? U.S. foreclosure activity peaked in 2010, fueled by the 2007-2009 financial downturn and lending practices that caused the subprime mortgage crisis. At that time, many homeowners who could not make payments were “underwater” on their homes, meaning they owed more than the market price for the property.
The situation in 2010 led to a steep increase in short sales, where a homeowner sells the home for less than what is owed on the mortgage. All proceeds from the sale go to the lender, who can choose to forgive the remaining debt or obtain a deficiency judgment through the courts, requiring the homeowner to pay the remaining debt. In 2010, the number of real estate short sales in the U.S. increased by more than 300 percent over 2008. Lenders faced losses exceeding $300 million annually. Over half of all short sales took place in four states: California, Florida, Texas, and Arizona.
A notable difference, however, between the foreclosure environment then and today is that most homeowners now have significant equity in their properties. In September 2022, homeowners with mortgages saw an increase in equity of 27.8 percent compared to the previous year; on average each homeowner gained around $60,000 in equity. The total average equity per borrower reached almost $300,000, the highest since CoreLogic, a leader in property data, started tracking this data. By contrast, 44 percent of delinquent borrowers had no home equity in the years following the financial crash of 2007-2009.
One manifestation of this difference is that homeowners may be selling their homes to leverage their equity, prior to facing a foreclosure. Indeed, very few properties are completing the foreclosure process and actually reverting to the lender and becoming “real-estate owned” (REO) or “bank owned” properties. It's that, because homeowners can sell their properties and pay off the balance of their loans, foreclosure filings don't reach the auction or sale point of the legal proceedings. Since we don’t have foreclosure data that can track the outcomes of each filing, it is impossible to know how many borrowers with a recent foreclosure filing were able to avoid losing their home by making payments, and how many sold their property to avoid a foreclosure sale. But the rate of distressed sales, foreclosures, and short sales was only 1 percent of U.S. home sales in October 2022, lending credence to the theory that homeowners in financial distress are selling rather than facing foreclosure.
Housing Market Factors Could Increase Foreclosure Judgements
But several factors, such as a cooling housing market, could increase foreclosure judgements and repossession of properties by lenders in 2023. Sales of existing homes have declined for nine consecutive months; in October 2022, year-over-year sales dropped by 28.4 percent compared to October 2021. With higher mortgage rates, fewer buyers can qualify to purchase a home. Rates for a fixed rate 30-year mortgage rose from 2.96 percent in October 2021 to 6.9 percent in October 2022. With both a drop in sales price and fewer buyers qualifying to purchase a home, those looking to sell to avoid foreclosure may find it harder to cover the extent of their outstanding mortgage.
With rising inflation rates, households are accumulating more household debt. In Q3 2022, total debt stood at $16.51 trillion–$2.36 trillion higher than the end of 2019. Mortgage balances have increased $1 trillion over the third quarter 2021, increasing to $11.67 trillion. Former homeowners who turn to the rental market will also face higher costs. Average monthly rents in the US increased 15.2 percent between May 2021 and May 2022. Many metropolitan areas have seen even higher increases such as Austin (48 percent increase in rents), Nashville, Seattle (both 32 percent) and Miami (29 percent). For the first time, the median monthly asking rent nationwide has surpassed $2,000.
Heading into 2023: An Uncertain Outlook
As we head into 2023, the outlook for foreclosure activity remains unclear. On one hand, the increase in filings over the past year could indicate a return to the pre-pandemic level or higher. Though it is possible the increase represents a backlog of filings, and foreclosure filings will level off or even decrease as “pent up” foreclosure activity wanes.
However, the economic downturn could place more homeowners at risk of foreclosure as costs increase and borrowers, many still reeling from the impacts of the pandemic, struggle to make ends meet. At least for the moment, many homeowners may be able to fall back on equity to either make ends meet or to pay off their mortgage if they sell. But this too could change, especially for borrowers who purchased their home more recently and paid top dollar.