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The Covid-19 relief efforts that were meant to help homeowners with mortgage payments and prevent people from losing their homes is creating a new record for the housing market: Foreclosures filed in 2021 hit the lowest rate in more than a decade.
There were 151,153 foreclosure filings in 2021, a 29% drop from 2020 and the lowest number in at least 16 years—when real estate data analytics company, ATTOM, began tracking this data in 2005.
Significant contributing factors to the low foreclosure rate levels were the Covid-related forbearance on mortgage payments, a ban on home evictions and a 2021 mortgage servicing rule that discouraged foreclosures. While there are still some mortgages working their way out of forbearance, the ban on evictions has long since expired on July 1, 2021, and the servicing rule by the Consumer Financial Protection Bureau sunset on Jan. 1, 2022.
“The government’s foreclosure moratorium, the mortgage forbearance program, and the mortgage servicing guidelines enacted by the CFPB in August have kept foreclosure starts artificially low over the past year,” said Rick Sharga, executive vice president at ATTOM company, RealtyTrac, in a press release. “While the recovering economy should prevent a huge increase in defaults, we should see a gradual increase in foreclosure activity as these programs expire, and servicers exhaust all loan modification options for delinquent borrowers.”
Most experts agreed that there would be a slow rise in foreclosures as Covid relief efforts end. But how high foreclosures go is largely dependent on whether lenders can ease struggling borrowers out of forbearance and into workable payment options.
Where Foreclosures Are Headed
There are roughly 2.73 million mortgages either in forbearance or past due, according to the Federal Reserve Bank of Philadelphia’s latest report released Jan. 14. Among those mortgages, nearly 800,000 are in the Coronavirus Aid, Relief and Economic Security (CARES) Act’s forbearance measure, with 89% of those set to expire in the first half of this year.
“With the expiration of additional safeguards against foreclosures provided by the Consumer Financial Protection Bureau (CFPB) by year-end 2021, unless mortgage servicers can successfully execute home-retention options, many borrowers face the prospect of selling their homes or losing them to foreclosure,” the report said.
The temporary CFPB rule required mortgage servicers to make every effort to ensure struggling borrowers clearly knew what they could do to avoid foreclosure, including modification and alternative payment options. Without this rule in place, housing experts are urging lenders to continue to educate borrowers on their options and make them readily available. Otherwise, foreclosures could begin to climb later in 2022, says Faith Schwartz, CEO of housing advisory practice Housing Finance Strategies.
Schwartz also noted the federally sponsored Homeowner Assistance Fund (HAF) program that provides nearly $10 billion to states in order to help homeowners with past-due and current bills. These funds are distributed at the state level.
“The programs offered by government agencies were amazing, and most borrowers have a path to a modification or deferral if they’re still employed” says Schwartz. “However, the more challenging issues in 2022 will be to ensure borrowers know about state Homeowners Assistance Fund programs on top of extraordinary loss mitigation solutions.”
However, others point to a combination of job growth, a strong seller’s market and the latest jump in home equity as preventing a spike in foreclosures.
“The expiration of the CFPB safeguards are unlikely to trigger large amounts of foreclosure activity because homeowners have more equity than ever before,” says Odeta Kushi, chief economist at First American.
Today’s borrowers benefit from the hard lessons of the 2008 housing crisis as the federal and state governments have been more responsive to struggling borrowers, says David Dworkin, president and chief executive officer of the National Housing Conference.
“We’ve learned a lot from the last housing crisis and how to reach homeowners and how to modify their mortgages to help them stay in their homes,” Dworkin says. “And we have such a shortage of housing stock, we don’t expect to see a market disruption because of unavoidable foreclosures.”
Still, the Philadelphia Fed estimates there are more than 1 million borrowers who are not in forbearance and more than 90 days past due on payments, called seriously delinquent.
“In the coming months, both bank and nonbank servicers will be challenged with executing home-retention or other foreclosure alternative options for these borrowers and for another 1.15 million borrowers seriously delinquent and not in forbearance,” the Philadelphia Fed report said.
The most important step homeowners can take if they can’t afford their mortgage payments is to communicate with their lender as soon as possible, Dworkin says. He advises homeowners to negotiate a “soft landing” with their lenders rather than going through foreclosure.
“It’s human nature to shut down and avoid uncomfortable conversations, but communication with your mortgage servicer is critical,” Dworkin says.
Foreclosure not only means losing your home but also facing huge blows to your credit score, which can affect your ability to secure future housing and even a job. Borrowers behind on mortgage payments can get help in several ways, including:
- Apply for forbearance (if it’s a government-backed mortgage)
- Refinance into a longer-term mortgage
- Apply for a loan modification
- Apply for the Homeowners Assistance Fund
- Rent out part or all of the home
- Sell the home
Borrowers with mortgages backed by Fannie Mae or Freddie Mac can still apply for mortgage forbearance if they haven’t already done so. Forbearance allows homeowners who have suffered financial blows to reduce or pause their mortgage payments for up to 18 months while they either find a new source of income or come up with an alternative plan.
For mortgages that are not federally backed, borrowers should contact their servicers and state governments to find out what options are available to them.
If you want to lower your monthly mortgage payments, you may be able to extend the term of your mortgage (how long you have to repay the mortgage) by refinancing. For example, if you have 20 years left on your mortgage, you can apply for a 30-year refinance, which will reduce your monthly payments.
Refinancing can have a bonus benefit if you can also reduce your interest rate. Keep in mind that you will have to pay closing costs, which can cost anywhere from 2% to 5% of the total amount of the loan. Some lenders will allow you to roll those costs into the mortgage, so you don’t have to pay it upfront. To find out how much you can save by extending the term, lowering your interest rate, or both, check out the Forbes Advisor mortgage refinance calculator.
Some homeowners might qualify for a loan modification, which can reduce the cost of your mortgage–including the principal and interest. Loan modifications are at the discretion of your lender and terms will vary based on your lender.
If you have not already sought financial help through the HAF program, contact a housing counselor approved by the U.S. Department of Housing and Urban Development (HUD). They offer free services and are available in every state. To locate a housing counselor in your area, visit the HUD website.
If you don’t want to refinance or modify your loan–or you don’t qualify for either–you can also rent a portion of the home to help pay the mortgage. However, be sure to understand the risks associated with renting out your home or a part of your home. For homeowners who don’t have experience being a landlord, or with the laws that govern tenants and rental units in your area, talk to an expert so you understand what you’re getting into.
Finally, thanks to the current hot housing market, many homeowners will be able to sell their homes and capture a profit. According to mortgage technology and analytics provider, Black Knight, homeowners gained $250 billion in tappable equity in the third quarter of 2021 alone.
While selling might not be the ideal situation for some people, it’s better than facing foreclosure. Moreover, struggling homeowners who don’t access help and get behind on their mortgage payments will quickly erode any equity they have by amassing costly late fees and even legal fees.
“Mortgage borrowers who are under-employed or unemployed may need to find a graceful exit if they do not qualify for a solution,” Schwartz says. “The challenge for any individual when all solutions fall short will be the rapid deterioration of equity by fees and penalties.”