(Photo by Matthew Henry from Burst)

Whether they are interested because of their own financial situation or because homes in foreclosure tend to be a great deal for home purchasing, many in the real estate market are interested to see how the end of forbearance under the CARES Act extension during the ongoing health crisis could mean foreclosures are coming.  

Will it lead to a glut of homes in foreclosure? Or will the strong market cause homeowners to try to recoup any equity by placing their property up for sale?

What is Forbearance?

Forbearance is a temporary modification of the payment obligations on a loan. In forbearance, missed loan payments aren’t forgiven, though they may be reduced or suspended temporarily during times of financial hardship, only to be caught up later. 

Paused payments during mortgage forbearance aren’t reported as delinquent to the credit bureaus, and banks won’t come after your home. 

Why Is Forbearance Important Right Now? 

During the coronavirus pandemic, forbearance was particularly useful, with participants taking advantage of multiple forbearance extensions until June 30, 2021 (a total of 15 months).  The date an individual’s forbearance period ends is typically 360 days from the day it begins, but these Coronavirus Aid, Relief, and Economic Security (CARES) Act extensions allowed for a longer than usual pause to catch up on payments — and mandated that lenders can’t make borrowers catch up on any missed payments in a single lump sum.

Instead, when the forbearance period ends for those taking advantage under CARES, they will need to start making payments on their mortgage again, as per their agreement with their lender.  (Many lenders are continuing to modify loans to make them affordable even after the sunset of the CARES extension, so options may be available.)

The Mortgage Bankers Association estimates that about 1.7 million homeowners were in forbearance plans as the last CARES Act extension was terminating.

What Happens After Forbearance?

The majority of homeowners in forbearance have workout options as described above. But if not, and they cannot make payments on their mortgage loans, a property owner will need to look for other ways to exit forbearance.  Most often this means selling the home or defaulting on the mortgage, which means foreclosures are coming. 

Will the End of Forbearance mean Foreclosures are coming?

This scenario isn’t likely. If the past proves to be a reliable indicator, a large portion of homeowners exiting forbearance and unable to catch up on mortgage payments will opt to list their homes for sale. 

The strong market and high prices the nation has seen on homes also indicates that this is an individual’s strongest option. A homeowner who exits forbearance but is still in such financial straits that they can’t afford to resume their mortgage payments is most likely able to manage to sell their home, given the strength of the housing market.

Over the past year, market statistics have shown that roughly 25% of borrowers listed their property for sale following their exit from forbearance.

Will Housing Be More Plentiful/Affordable?

Again, the end of forbearance doesn’t mean that most homeowners will need to exit their homes. They will most likely reach new agreements with their lenders to find appropriate payment terms. 

The smaller percentage of owners that are unable or unwilling to reach new lending terms will either sell their homes or default on mortgage payments, which means foreclosures are coming. Either way, this small percentage of homes will be coming onto the market.

The end of forbearance and the introduction of a small supply of additional homes on the market isn’t necessarily likely to cause major disruption, though it will introduce some new options, especially for single-family homes. 

With today’s tight housing supply, homes for sale are selling quickly, and additional inventory is being snapped up fast. Sellers in financial delinquency are most likely able to sell their home at its highest market value.

Any foreclosures coming onto the market won’t cause significant disruption either. They will be fewer, and at higher prices, so they will not cause a glut and price declines but will help alleviate the tight housing supply and lead to slower price appreciation.

In short, investors or individuals looking for foreclosed homes as affordable options for a home purchase in today’s market shouldn’t imagine that the end of forbearance means a large number of foreclosures are coming. Too many other, more attractive options exist for homeowners that are unable to resume original payments on their mortgage loans. 

If you are looking for a home in the Springfield or Burke areas and want to see all of the options coming on the market, let LIST WITH ELIZABETH® help you navigate this interesting time in real estate and perhaps find the perfect home for you and your family today!