In light of the economy’s continued uncertainty, many mortgage lenders are worried about the rising rates of foreclosures and bankruptcies. While COVID-19 loan moratoriums temporarily suppressed these rates, the post-pandemic era has new trends in store.
So, what does this all mean for mortgage lenders? In this article, we’ll explore the relationship between forbearance, foreclosures, and bankruptcy. We’ll also highlight some factors that mortgage lenders can look at to predict the foreclosure and bankruptcy rates going forward.
What Are the Residual Economic Effects of the COVID-19 Pandemic?
President Biden ended the COVID-19 National Emergency on May 11th, 2023,[i] but the pandemic’s effects are still reverberating throughout the economy. Some of these effects are influencing foreclosure and bankruptcy rates.
Here are some notable shifts brought about by the pandemic:
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- Loan moratoriums – When the COVID-19 pandemic hit, the economy came to a standstill. Regulators wanted to avoid a 2008-type housing crisis, so they introduced forbearance programs that allowed borrowers to pause their government-backed mortgage payments and student loan payments. Thanks to these loan moratoriums, many homeowners avoided foreclosure and bankruptcy during the pandemic.
- Low interest rates – Another notable feature of the pandemic’s economy was record-low interest rates. In 2021, the Federal Reserve slashed interest rates to next to zero.[ii] In turn, many businesses were able to expand rapidly while relying on this free money. Now that interest rates have increased significantly, some businesses are struggling to maintain their profits.
While these short-term solutions kept many people afloat for the past few years, financial experts are still debating their long-term impact.
What Does Mortgage Forbearance Look Like in 2023?
The COVID-19 emergency may be over, but forbearance programs are still alive and well. In fact, on January 30th, the Department of Housing and Urban Development (HUD) announced its expansion of access to the COVID-19 forbearance program to borrowers facing any type of financial hardship.[iii] This change took effect for all mortgage lenders on April 30th, 2023.
Here’s a brief overview of the other changes included in HUD’s announcement:
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- Increase in FHA’s Standalone Partial Claim – Standalone Partial Claim allows borrowers to move their mortgage arrearages into 0% interest subordinate liens against their homes. These liens don’t need to be repaid until the mortgage is paid off, the loan is refinanced, or the property is sold. With HUD’s update, Partial Claims can be for amounts of 30% of the unpaid loan principal, as opposed to the previous 25%
- Extension of COVID-19 Recovery Loss Mitigation Options – COVID-19 Recovery options, including Advanced Loan Modification (ALM), Recovery Modification, Recovery Standalone Partial Claim, Pre-Foreclosure Sale (PFS), and Deed-in-Lieu (DIL) of Foreclosure will be extended for an additional 18 months, starting April 30th. These options were originally set to expire at the end of the COVID-19 National Emergency.
- Expansion of “Imminent Default” Definition – Previously, borrowers could only be considered in “imminent default” if they were delinquent on their loans. This definition has been expanded to include those who may not be delinquent anymore but are still in need of assistance.
- Incentive Payments for Loan Servicers – HUD will provide incentive payments to compensate mortgage servicers for the cost of enacting these COVID-19 forbearances and loss mitigation options.
According to HUD’s Assistant Secretary, Julia Gordon, “FHA’s COVID-19 forbearances and streamlined COVID-19 loss mitigation options have successfully helped millions of struggling borrowers in the last two fiscal years alone. Our action today lets us capitalize on what we have learned through the pandemic to continue helping borrowers avoid foreclosure, regardless of the nature of their hardship.”
What’s the Relationship Between Forbearance, Foreclosure, and Bankruptcy?
Now that you understand the current loss mitigation landscape, you may be wondering how it affects foreclosures and bankruptcies. As more homebuyers exit their forbearance periods, foreclosure rates are on the rise. In fact, January 2023 saw a 36% year-over-year uptick in foreclosures.[iv]
Bankruptcies are expected to follow suit soon, too. That’s because people typically make their mortgage payments for as long as they can—once they default on those, bankruptcy is often around the corner.
Filing for Chapter 13 bankruptcy can halt foreclosure temporarily, giving some borrowers enough breathing room to get their finances back on track. Unfortunately, only 30% of borrowers successfully stave off foreclosure by filing for Chapter 13 bankruptcy. The rest still end up losing their homes down the line.
What Economic Indicators Should Mortgage Lenders Pay Attention To?
As the economy and housing market continue to evolve, foreclosure and bankruptcy rates are subject to change. Here are some factors that can shed light on the direction of foreclosure and bankruptcy rates:
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- Consumer debt – This year, consumer debt reached a record high of $17.05 trillion.[v] Naturally, rising rates of consumer debt increase the potential for foreclosure and bankruptcy.
- Unemployment rate – Low unemployment rates have historically been correlated with fewer bankruptcies and foreclosures. While the current unemployment rate is just 3.4%,[vi] there’s still a large swath of unfilled positions. Financial experts have yet to make sense of this unique situation and what it means for foreclosures and bankruptcies going forward.
- Home prices – Decreasing home prices can spike loan-to-value (LTV) ratios, putting some homeowners underwater. High LTVs were a notable feature of the 2008 housing crisis. Home prices are projected to decline in the coming months, but HUD’s recent announcement may cause this to reverse course. After all, the goal of HUD’s update is to help more people stay in their homes. Fewer homes being sold means less inventory. As long as the demand for homes exceeds the supply, home prices will stay high.
- Mortgage rates – Another cause of low housing inventory is the high mortgage rates. Homeowners who are locked into mortgage rates of 2% to 3% are reluctant to sell their homes right now, knowing that much higher interest rates await them on the other side. As a result, they’ll likely keep their homes off the market until mortgage rates drop, contributing to the lack of inventory.
- Auto loan defaults – After mortgage payments, car payments are typically the ones that borrowers do their best to make on time. That’s because many Americans rely on their cars to commute to and from work. If auto loan defaults start to go up, foreclosures and bankruptcies may be looming as well.
What Does the Future Hold For Foreclosure and Bankruptcy Rates?
In a recent Talk Data to Me podcast episode, we spoke with bankruptcy experts, Scott Fink and Benjamin Hoen, of Weinberg and Reis Co, LPA. They shared their assessments of the current default landscape, as well as their predictions for 2023.
This year, rising consumer debt is one of their chief concerns. They explained that many consumers have gotten used to a financial reality where their debt payments are on pause. Now that this is no longer the case, consumers are exhausting all of their credit options to keep up with their elevated expenses.
Fink and Hoen also believe that the Supreme Court’s student loan forgiveness ruling may have a notable impact on foreclosures and bankruptcies. If student loan forgiveness falls through, bankruptcies may spike. Based on all available evidence, Fink and Koen suspect that bankruptcies will reach pre-pandemic levels at some point during 2024.
How to Help Borrowers Prevent Foreclosure
Foreclosures can be incredibly expensive for mortgage lenders. Thus, you want to do everything in your power to help your borrowers avoid them.
Here are some ways to protect your mortgage lending business from foreclosures:
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- Educate your borrowers – As the saying goes, forewarned is forearmed. In addition to staying up to date on the factors we listed above, it’s important to educate your borrowers about them too.
- Communicate with your borrowers – Next, it’s important to stay in touch with your borrowers and maintain open communication about their financial status. This way, you can suggest helpful foreclosure avoidance strategies if their payments start to become unaffordable.
- Recommend forbearance and loan modifications – As proven by the pandemic, forbearance is an effective way to keep struggling borrowers out of foreclosure. Thanks to HUD’s expansion of qualifying hardships, a larger portion of your borrowers can pursue forbearance if needed. Loan modifications can also help your borrowers hold onto their homes.
- Prioritize compliance – We’re currently moving from an origination market to a loss mitigation market. Navigating this type of market requires comprehensive training and careful compliance. You want to be prepared for regulators’ scrutiny and ensure you treat all of your borrowers fairly.
Certified Credit: Navigate the Evolving Mortgage Market With Confidence
If you want to thrive amidst these ever-changing market conditions, it helps to have a reliable vendor partner by your side. Here at Certified Credit, we develop innovative solutions for mortgage lenders. Some of our offerings include:
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- Affordable credit reports
- Credit score improvement tools
- Automated lead generation and borrower retention tools
- Automated prequalification
- Automated verification of income and employment
- Automated undisclosed debt monitoring
- Flood zone determinations
- Fraud and risk support
- Settlement services
Want to find out how our solutions can sustain your long-term growth? Schedule a credit consultation with the Certified Credit team today.
To learn more about this topic, don’t forget to check out our Talk Data to Me podcast episode with Scott Fink and Benjamin Hoen.
Sources:
[i] NPR. Biden ends COVID national emergency after Congress acts.
https://www.npr.org/2023/04/11/1169191865/biden-ends-covid-national-emergency
[ii] CNBC. Fed rate cut lowers interest rates to near zero—but how much are you really saving on your credit card debt?
https://www.cnbc.com/select/impact-of-fed-rate-cut-amid-coronavirus-concerns/
[iii] HUD. Mortgagee Letter 2023-02.
https://www.hud.gov/sites/dfiles/OCHCO/documents/2023-02hsgml.pdf
[iv] ATTOM. U.S. Foreclosure Activity In January 2023 Continues To Increase Annually For 21 Consecutive Months.
[v] Federal Reserve Bank of New York. Total Household Debt Reaches $17.05 trillion in Q1 2023; Mortgage Loan Growth Slows.
https://www.newyorkfed.org/newsevents/news/research/2023/20230515
[vi] BLS. The Employment Situation — April 2023.
