COVID-19ForbearanceMarket NewsMarket UpdateMatthew GardnerMonday with MatthewMortgageReal Estate July 27, 2021

7/26/2021 Housing and Economic Update from Matthew Gardner

 

This video is the latest in our Monday with Matthew series with Windermere Chief Economist Matthew Gardner. Each month, he analyzes the most up-to-date U.S. housing data to keep you well-informed about what’s going on in the real estate market. 

 


 

Hello there!  I’m Windermere Real Estate’s Chief Economist, Matthew Gardner, and welcome to the latest episode of Mondays with Matthew.

This month, we are going to take another look at forbearance activity across the U.S.  Now I know that we have talked about this subject several times over the past year, but it is worthwhile to look at it again if only for the fact that the program stopped taking new applications for forbearance at the end of June.

So, let’s take a look at where we were when the forbearance program started and where we are today.

 

 

And as you can see from this first chart, the situation today is a vast improvement from where we were last May when there were more than 4.76 million homes in the program. For context, that meant that more than 9% of all homes with a mortgage were in the program last May – a huge number.

But the latest data from Black Knight Financial shows that – by mid-July of this year – the number had dropped to just over 1.86 million homes, or roughly 3.5% of houses with a mortgage.

This is certainly a pretty impressive recovery, as it means that 2.9 million homeowners left the program between May of 2020 and mid-July 2021.

 

Power point slide titled “Forbearance Plans by Lender” showing a graph of active forbearance plans. The x-axis shows the dates from April 16 2020 to July 6 2021 and the y-axis shows the number of active plans starting at 0 at the bottom and increasing by 500,000 each line with 2.5 million at the top. Three lines represent the different lenders, light blue is Fannie/Freddie, Orange is FHA/VA, and green is Other. They all follow a similar trend, peaking in May and June or 2020 and steadily decreasing until they reach their lowest in July 2021 to the far right of the graph. The source is Black Knight Financial.

 

And when we look at the makeup of mortgages in forbearance, the largest share came from loans backed by Fannie Mae and Freddie Mac – not surprising given the size of their mortgage portfolio – with, at the peak, just shy of two million homes in the program – roughly 7.2% of their total portfolio.

But that number has now dropped to 582,000 or just 2.1% of loans outstanding.

Loans backed by the FHA or VA also peaked last May at about 1.53 million or 12.6% of their portfolio.

But today that number has dropped to 755,000 or 6.2% of the mortgages they hold.

And finally, loans showed here as “other” represent private label securities or portfolio loans, and it’s interesting to see that their numbers didn’t peak until late June when just short of 1.25 million homes – or 9.6% of their portfolio – were in the program.

However, today that number had dropped to 524,000, or 4% of mortgages backed by these entities.

 

What I see from the slides that we have looked at is that the number of active forbearance plans continues to fall; however, the pace of the drop has certainly slowed over the last quarter or so.

After seeing a monthly drop of 12% in April – as a large volume all plans hit their 12-month review date – the pace of improvement has since slowed to just 5% over the past 30 days.

Although the number of homes in forbearance is still higher than I would like to see, fewer than 4% of all mortgages are in the program and we haven’t seen this level since April of 2020, just as the pandemic was kicking in.

 

Power point slide titled “Scheduled Forbearance Plan Expirations” with a bar graph. The x-axis of the bar graph shows months, starting with February 2021 and ending with December 2021. The bars show that a majority of the plans are expiring in June, July, August, September and October. The source is Black Knight Financial.

 

As we look forward, you can see that almost 600,000 homes currently in forbearance are coming up for review so the potential for a greater rate of improvement in the overall number of homes in the program is certainly possible – but not guaranteed.

 

Power point slide titled “Nominal & Inflation-Adjusted Home Prices” with a line graph that shows the Forbearance plans starts. The x-axis is labeled with dates from May 5, 2020 to June 15, 2021 and the y-axis has the number of plans starting at 0 and increasing by 50,000 until 300,000 at the top. There are three lines, the teal line shows the new starts, green shows the re-starts, and the light blue shows the Forbearance plans start. The teal and the light blue line closely match each other, with a peak in May 2020 and a slow decrease since then, while the green line starts low and matches the blue lines starting in September 2020 and then following the same trend from there. The source is Black Knight Financial.

 

Unsurprisingly the number of homes entering the program for the first time as well as repeat plan starts is lower than we saw last summer but again the pace of improvement has slowed. That said, overall starts are down by 3% on the month and when we combine new and repeat starts the number is 3 to 4% lower.

 

Power point slide titled “Nominal & Inflation-Adjusted Home Prices” with a line graph that shows forbearance plans removals and extensions. The x-axis shows the dates from April 21 2020 to June 15 2021, y-axis shows the number of plans starting at 0 at the bottom and increasing my 100,000 until 900,000 at the top. The blue line represents the forbearance plan removals and the green line shows the plan extensions. The green line has a clear spike in June/July of 2020 and the blue line has a clear spike in October 2020. The source of this information is from Black Knight Financial.

 

Of the roughly 460,000 homes in forbearance that were reviewed for either extension or removal from the program in the first two weeks of June, 33% left the program while 67% had the term extended.  This is a lower removal rate than we saw during the first two weeks of either April or May, but I expect to see more homeowners come out of the program, but only as long as the country continues to reopen, and that is not a certainty given the rise of the Delta and Lambda variants of the COVID-19 virus.

Power point slide titled “Nominal & Inflation-Adjusted Home Prices” with a line graph that shows the final expiration month of active forbearance plans that assumes the plans expire in 18 months. The x-axis is the plan final expiration month from May 2021 to July 2022 and the z-axis shows the number of plans from 0 to 450,000. The line spikes in September 2021 around 400,000 and then quickly goes down so that by November the line evens out in the 150,000 range. The source of this information is Black Knight Financial.

 

I actually found this chart to be very interesting. Of the more than two million active forbearance plans, approximately half are scheduled to reach their 18-month terminal expiration date in September and October of this year.

And if we take this data, and then project a fairly modest 3% monthly rate of homeowners leaving the forbearance program, it means that over 900,000 homes would exit the program in the third and fourth quarters of this year.

And with 575,000 thousand plans scheduled to expire in September and October alone – that means that mortgage services will be faced with the daunting task of having to process nearly 15,000 plans per business day during that time. It’s going to be a lot of work!

 

Power point slide titled “Nominal and Real Monthly Payment” with a pie graph that shows the current status of COVID-19 related forbearances as of June 15, 2021. 46% of the pie is orange, representing the total removed or expired plans. 26% of the pie is light blue representing the 1.863 million plans that are active because of a term extension. 18% of the pie is navy representing the 1.292 million who are paid off. 4% is green showing the removed/expired – delinquent and active loss mit. Another 3% is brown, showing the number of plans that were removed/expired because they were delinquent. And the last 3% is grey showing the plans that are active in their original term. The source of this information is Black Knight Financial.

 

Roughly 7.25 million borrowers have used the forbearance program at one time or another through the course of the pandemic and that represents roughly 14% of all homeowners in the country.

Of that 7.25 million, the chart here shows that 72% have left the plan, and 28% remain in active forbearance, but you can also see that loan performance remains pretty robust among homeowners who have left the program with 46% of them getting things squared away with their lenders in regard to missed payments, and 18% having paid off their loan in full – likely from selling or refinancing with a different lender.

You will also see that the number of borrowers in post forbearance loss mitigation is down a tad to 333,000, while those who have left forbearance but still remain delinquent and not in loss mitigation accounts for roughly 3% of total loans in the program or just 195,000.

 

So, the way I see it, although the number of homes leaving the program has certainly slowed which, quite frankly, doesn’t surprise me, I still expect further improvement as we move through the year not just because the economy continues to reopen and people are getting reestablished at work, but also because we won’t be seeing any new owners enter the program.

And finally, I want to show you what parts of the country have a high share of homes in forbearance.

 

Power point slide titled “Nominal and Real Monthly Payments” with a map of the United States of America. Each state is shaded in a color that represents how many homes are still in forbearance. Washington is green at 3.7%; Oregon is green at 3.2%; California is yellow at 4.6%; Idaho is green at 2.3%, Nevada is dark orange at 6.5%; Montana is green at 2.6%, Colorado is green-yellow at 4.3%; Utah is green at 3.9%; Hawaii is orange at 6.8%. Texas and Louisiana are the states with the most, sitting at 7% and 7.9% respectively. Note this data is from March, as State and County data suffer a 3 month delay before it’s released. The source of this is from Windermere Economics analysis of Atlanta Fed data.

 

I must tell you first off, that this data isn’t that timely – in fact these numbers are from March as the data I get at the State and County grain is subject to a three month lag.

Anyway, as you can see from this map, not all states are created equal, with the share of homes in forbearance still elevated in Louisiana, Texas and, to a lesser degree, New York State.

Out here in the West, the rate in Nevada is still high, and California and New Mexico are both somewhat higher than I would like to have seen but, as I just said, this data is a little old, and I believe that the share of homes in forbearance in both Nevada and California is lower today than you see here.

 

Given everything that we’ve looked at today, there are a couple of conclusions that can be drawn.

The first, and most obvious, is that anyone believing but there will be a flood of homes that will be foreclosed on either toward the end of this year or in 2022, is likely to be disappointed. Even if every home still in the program does enter foreclosure which, by the way, is basically impossible, the number of homes that would be foreclosed on would be minimal when compared to the fallout following the financial crisis of more than a decade ago.

And when I say that it’s virtually impossible to expect to see all homes will be foreclosed on, it’s mainly because of the remarkable run up in home values that the country has seen since 2012.

The buildup of equity that all homeowners have seen whether they bought before 2012, or even as recently as the past 2 or 3 years, suggests that if, for whatever circumstance, owners in forbearance can’t get their heads back above water, they will choose to sell their home – in order to keep the equity that they have accumulated.

A typical homeowner in forbearance has a sizeable equity in their home, with median equity of a homeowner in the program measured at just over $100,000. And this significant amount of cash in their homes would allow them to pay the bank back any missed payments, sell, and still walk away with a sizable amount of equity.

The bottom line is that have the forbearance program was needed and it can be said that it has been successful so far in warding off home foreclosures because of the remarkable impact of the pandemic.

Although it would be naïve to suggest that foreclosure rates won’t rise at all, as the forbearance program winds down, I do see them ticking higher but, given all the data that I’ve been looking at, I would be very surprised to see overall foreclosure rates rise to a level significantly above the long-term average.

Well, I hope that you have found this month’s discussion to be interesting. As always if you have any questions or comments about this topic, please do reach out to me but, in the meantime, stay safe out there and I look forward the visiting with you all again, next month.

Bye now

 

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