2022 Foreclosures: Tick or Torrent?
The CARES Act mortgage forbearance plan came to an end on June 30, 2021, and the rate of foreclosures spiked by double-digits. Will the coming months bring a foreclosure flood?
The pandemic-fueled homebuying frenzy of 2020 and 2021 caused the housing inventory to dry up and the real estate market to skyrocket. At the same time, a mortgage forbearance plan was rolled out via the CARES Act, allowing homeowners to put mortgage payments on pause without penalty. This graph from ATTOM shows the impact of CARES on the nation’s foreclosure rate—it became practically nonexistent.
WHAT COMES DOWN MUST GO UP
But the moratorium on mortgage repayment ended on June 30, 2021, and some analysts have been waiting for the other shoe to drop. The fear is that a wave of foreclosures à la 2008 is headed our way. This would be bad news because a high rate of foreclosures negatively impacts the whole economy: Jobs are lost, individual spending is reduced, credit becomes difficult to obtain, and the economy slows down in response.
There are no guarantees in life, but here’s what will definitely happen in a post-CARES world: Mortgage rates will go up, increases in home prices will slow down, and the number of foreclosures will increase. In fact, they already have.
Foreclosures jumped 32% from the second quarter of 2021 to the third. And they were up 67% over the same period in 2020 (the first double-digit increase since 2014). Florida posted the 3rd highest number of these foreclosures, behind only California and Texas.
But taking a step back, foreclosure activity is still 70% lower than it was before the pandemic, even with this huge jump. The possibility of lots more foreclosures in 2022 certainly exists, but there’s a long way to go before we get back to even the normal number.
“Foreclosures are very likely to rise over the next year, with the increase ranging from a tick to a torrent,” says Todd Teta, CTO at ATTOM.
A SECOND POSSIBILITY
Foreclosures could stay low. According to a December report from the Mortgage Bankers Association, only 1.67% of mortgage loans are still in forbearance. Most homeowners left the plan caught up on their payments or with an updated agreement. By the numbers:
38.6% left the program paid in full
44% worked out repayment plans
.6% sold their homes as a short sale or gave their homes to the bank in exchange for getting out of their mortgage
16.8% left the program way behind on their mortgage and with no plan
But with home prices soaring over the last two years, most of the 17% who left the forbearance program without a plan have enough equity to sell their homes if they have to, and they could actually leave the closing with cash instead of facing foreclosure.
A balanced market, one that favors neither buyer nor seller, would have six months’ worth of inventory. There was already a housing surplus when foreclosures hit the market in 2008. Inventory was pushed to nine months. Prices plummeted.
By contrast, today’s inventory stands at a razor-thin two months. No one wants to see anybody lose their home, but an increase in foreclosures would provide a much-needed boost to a desperately low inventory. Even if a million homes entered the market in 2022 due to foreclosures, it still wouldn’t be enough.
Rei Mesa, CEO of Berkshire Hathaway HomeServices Florida, says, “I’d see this as an opportunity for buyers because there is a lot of competition and very few listings.”
BOTTOM LINE
The foreclosure rate will almost certainly climb higher in 2022, but there’s a good chance it won’t rise even to the level of historical norms. And it may lead to opportunities for buyers who have been priced out of the market over the last two years.
