August 2nd, 2021 11:36 AM by Richard Sardella MLO.100007700/NMLS 233568
Borrowers no longer are in forbearance may now need to sell, signaling a possible positive shift in residential inventory
It wasn’t at all like 2008. When the pandemic hit in 2020 and millions of lost jobs were in the balance, the housing market didn’t crash. According to Fortune Magazine’s Lance Lambert, the opposite happened: A combination of government support, recession-induced low interest rates, and eager homebuyers set off a housing boom. Since then, median home prices are up a staggering 24%.
Now, he reports, “Much of that government aid and support is about to go away. The foreclosure moratorium, which prevents foreclosures of federally-backed mortgages, will come to an end on July 31. Then on Sept. 30, the mortgage forbearance program, which allows some borrowers to pause their payments, will lapse.” He goes on to say that since the beginning of the pandemic, more than 7 million homeowners have been enrolled in that program and while the economy has improved and that number has fallen, as of July 11, there are still 1.76 million borrowers, or 3.5% of U.S. mortgages, enrolled in the forbearance program.
If you recall what happened in 2008, the foreclosure crisis following the housing crash was so bad, in part, because tens of millions of financially strained homeowners were underwater, leaving many borrowers no choice but foreclosure. Fast forward to now, and that’s unlikely to be the case for financially strapped homeowners who are also likely sitting on sizable home equity. If they can’t repay the mortgage? They can simply sell into the currently red-hot housing market.
According to Lambert, if even a small fraction of the 1.75 million homeowners currently protected by the mortgage forbearance program opt to sell instead of going back to repaying their mortgage, it could have a big impact on the historically tight housing market. “According to the National Association of Realtors, there are only 1.37 million units currently available for sale,” he says. “Over the past four decades, the U.S. has averaged 2.5 million units at any given time. This year, housing inventory hit its lowest level since the data started getting tracked in the ’80s.”
Ali Wolf, of housing market research firm Zonda, told Fortune, “The wildcard in the supply landscape is what happens to the homes where the owners are in mortgage forbearance. Some will have returned to gainful employment and will work with their lenders to adjust the terms of their loan, allowing them to remain in their home. Others will not be so lucky and will lose their homes. Unless the forbearance period is extended again, though, we should expect some of those homes to hit the market over the next year.”
Lambert follows with the logical question: How many of these behind homeowners are likely to sell? To find out, Fortune asked researchers at Home.LLC, a startup that provides down payment assistance to homebuyers in return for a share of profits, to run the numbers. The findings indicate that if the government doesn’t extend the mortgage forbearance program, an additional 11% increase to housing inventory may be expected later this year. That alone, however, may not be enough to lower prices.
Home.LLC’s CEO Nik Shah adds, “High positive home equity among delinquent homeowners results in lower likelihood of foreclosure since people can refinance or sell the home to avoid defaulting on their mortgage” who goes on to say that those who do choose to sell are unlikely to shift the market. He predicts that the forecasted uptick in inventory is minor given that inventory is at a 40-year low. As a result, he projects that home prices will continue to grow rapidly even if the forbearance program ends.
Lambert says that while a lapse of the mortgage forbearance program is likely, it isn’t guaranteed, either. Created by the CARES Act in March, 2020, it has already been extended three times. The last extension came in late June when it extended forbearance to Sept. 30, but the White House hasn’t suggested another extension is looming. Their July 23rd statement on the issue reads: “Many homeowners exiting mortgage forbearance are returning to their pre-pandemic earnings and are no longer facing financial hardship associated with the pandemic. For homeowners who can resume their pre-pandemic monthly mortgage payment and where agencies have the authority, agencies will continue requiring mortgage servicers to offer options that allow borrowers to move missed payments to the end of the mortgage at no additional cost to the borrower.”
How Rates Move:
Conventional and Government (FHA and VA) lenders set their rates based on the pricing of Mortgage-Backed Securities (MBS) which are traded in real time, all day in the bond market. This means rates or loan fees (mortgage pricing) moves throughout the day, being affected by a variety of economic or political events. When MBS pricing goes up, mortgage rates or pricing generally goes down. When they fall, mortgage pricing goes up. Tracking these securities real-time is critical. For more information about the rate market, contact me directly. I’m among few mortgage professionals who have access to live trading screens during market hours.
Rates Currently Trending: Lower
Mortgage rates are moving slightly lower today. The MBS market improved by +34 bps last week. This was enough to improve mortgage rates or fees. The market experienced moderate volatility last week.
This Week's Rate Forecast: Lower
1) Jobs: It's the first week of the month, which means we get the big jobs report from the BLS. We actually have a jobs data deluge all week with employment indexes in the ISM Manufacturing and Services releases, ADP Private Payrolls, Challenger Job Cuts, Initial Weekly Jobless Claims, Non Farm Payrolls, Unemployment Rate, Average Hourly Earnings, Participation Rate and Average Work Week Hours. The overall strength (or lack thereof) will have a big impact on pricing.
2) Central Banks: We will get key interest rate decisions and policy statements from the Reserve Bank of Australia and more importantly, the Bank of England. We will also get a slew of important speeches from our own Federal Reserve as the bond market continues to try to handicap the timing of the eventual taper.
08/05 Waller, Fed Balance Sheet
3) Covid: The sharp rise of new cases continues to be a major driving force in a "flight to safety" which has helped bond yields in the past couple of weeks and looks to continue that positive support for pricing this week. Globally, we see that in China the outbreak is now the broadest since the original outbreak in late 2019, as cases are being found in 14 of 32 provinces. There are already MILLIONS on lockdown in China which looks to crimp the supply chain again. Domestically, we are seeing large spikes in cases as well and the CDC, White House and State and Local Governments are starting to tighten up guidelines which is likely to suppress the desire to re-enter the workforce or to spend, which is negative for our economy.
This Week's Potential Volatility: Neutral
This morning we are trending towards better pricing. Volatility is moderate as there should not be any major news coming out that can cause a sell off.
If you are looking for the risks and benefits of locking your interest rate in today or floating your loan rate, contact your mortgage professional to discuss it with them.
Richard Sardella has been actively managing and providing services in the mortgage industry for over 27 years. Richard serves on the board of directors as President of Colorado Home Mortgages Inc.
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