Foreclosures up 67% as Covid mortgage bailouts expire

A foreclosure sign outside a house in 2007.

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Foreclosures on the rise as government and private sector programs designed to help homeowners deal with the economic fallout from the Covid-19 pandemic expire.

Mortgage lenders began foreclosures on 25,209 properties in the third quarter, up 32% from the second quarter. Year-over-year, that’s a 67% increase over Q3 2020, according to ATTOM, a mortgage data company.

While the increase in foreclosures is dramatic, they anticipate extreme lows created by the forbearance programs. New foreclosures, also known as starts, typically amount to around 40,000 per month. They fell to just 3,000-4,000 in the first year of the pandemic, when the forbearance programs were in full effect.

Government and private aid programs have allowed borrowers with financial difficulties to defer their monthly payments for up to 18 months. The missed payments could then be pinned to the end of the loan period or repaid when selling the home or refinancing the mortgage.

States with the most new foreclosures were:

  • California: 3,434
  • Texas: 2,827
  • Florida: 2,546
  • New York: 1,363
  • Illinois: 1,362

“Despite the increased foreclosure activity in September, we are still well below historically normal numbers,” said Rick Sharga, executive vice president of RealtyTrac, an ATTOM company.

Foreclosure measures in September were nearly 70% lower than before the pandemic. The total foreclosure activity is also still 60% lower than it was a year ago.

“Whether the increase is a prelude to a more serious problem or just a return to normal levels of foreclosure is one of the bigger debates currently raging within the industry,” Sharga said.

Many borrowers are now getting out of forbearance programs. The biggest weekly decline to date came last week. Mortgage data and analytics firm Black Knight said the number of borrowers in bailout programs fell 11% each week.

The number of active forbearance plans decreased by 177,000, led by an 84,000 plan decrease in FHA / VA loans. As of October 5, nearly 1.4 million borrowers were left on pandemic moratorium, representing 2.6% of all active mortgage loans.

The majority of those emerging from the plans are back on track. Some of those whose payments are not up to date are working with lenders on loan modifications. Those who can’t contact their lenders or still can’t afford payments are either selling their homes or going into foreclosures.

Foreclosure numbers are likely to remain relatively low due to aggressive modifications by lenders and also due to the high level of home equity due to the recent real estate boom and the associated high home prices. According to CoreLogic, prices were up over 18% year-over-year in August.

“I think the ‘leniency cliff’ will be minimal,” said David Stevens, former CEO of the Mortgage Bankers Association and former FHA commissioner in the Obama administration.

“In contrast to the Great Recession, when house prices fell about 20% from high to low, house prices rose by roughly the same amount during this recession. So while we should see some foreclosures, the likelihood that there will be far fewer on a percentage basis is due to the ability to sell a home versus a standard or to stay in the house due to far better training options and higher reemployment.

The number of foreclosures is likely to continue to rise through the end of this year, according to Sharga, and return to normal levels by the middle of next year.

“They could then be a little higher than usual, but still well below the type of tsunami we saw during the Great Recession at the end of next year,” he added.

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