- Foreclosures are rising due to the expiration of mortgage forbearance and moratorium programs from the CARES Act.
- One real estate expert says that it's no cause for alarm as current market fundamentals remain strong.
With fewer Americans purchasing homes — even in pandemic housing hotspots like Austin and Phoenix — experts predict that US home prices could tank as much as 20% in 2023. And in previous housing booms and busts, downturns have been accompanied by a rise in short sales — when a homeowner and their lender agree to sell a house for less than the balance owed on the loan — and foreclosures, especially if the economy's health is deteriorating.
In 2008, a combination of cheap debt, predatory lending practices, and complex financial engineering led to a spectacular housing bust that triggered a crisis of short sales and foreclosures among homeowners who could either no longer afford to pay their mortgage or believed that it no longer made financial sense to do so.
While some of the factors that contributed to the foreclosure spike of the mid-2000s have reemerged in today's housing downturn, Rick Sharga, the executive vice president of market intelligence at real estate data and research firm ATTOM, told Insider that this time around, today's homeowners are at less risk of losing their property as market fundamentals are stronger and there are more programs to assist struggling borrowers.
"Historically, normal foreclosure activity means about a single percent of loans are in foreclosure," he told Insider. "Right now we're looking at about half a percent of loans that are in some stage of foreclosure. The pretty low levels of foreclosure activity are because the quality of the loans that have been issued over the last 10 years have been very strong."
Indeed, American borrowers are in a far better position than they were in 2008. US regulatory agencies have since enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act to help prevent some of the pervasive predatory lending practices that gave rise to the last housing crisis. There is also the Homeowner Assistance Fund, which is designed to help those who have fallen behind on their mortgages.
These initiatives paired with high levels of home equity — roughly $29 trillion as of the second-quarter of the year, according to the Federal Reserve — are likely to prevent an upcoming wave of short sales and foreclosures, Sharga suggests. According to him, that's because "market conditions are day and night" today compared to 15 years ago.
Foreclosure rates are rising but remain below historical levels
Data from ATTOM's December foreclosure report shows there were 30,677 foreclosure filings in November, specifically homes that either had default notices, scheduled auctions, or bank repossessions. While the rate jumped 57% from the same period in 2021, the figure remains well below 2019 levels, prior to the pandemic.
The spike in foreclosure activity between 2021 and 2022 stems from the expiration of temporary financial safety nets enacted through the CARES Act. The legislation gave financially burdened homeowners the ability to either temporarily pause or to reduce their mortgage payments during the early stages of the pandemic. The CARES Act was also notable for introducing a foreclosure moratorium on home loans backed by the Federal Housing Administration or public-private entities like Fannie Mae and Freddie Mac.
Sharga says the combination of these two intervention programs "virtually stopped foreclosure activity for much of 2020 and 2021," dropping the numbers to the lowest levels on record — "albeit somewhat artificially."
While the foreclosure rate is now rising, Sharga does not foresee activity climbing to worrisome levels as "economic fundamentals are pretty strong" in today's housing market. However, he warns that if the US does enter a recession next year, Americans who purchased a home near the peak of the market will be most at risk of going underwater on their homes. But even with this prospect, Sharga suggests that a substantial uptick in foreclosures or short sales is unlikely as many recent homebuyers have positive equity in their homes.
"What's interesting about this cycle is that even if a borrower does find themselves in foreclosure today, 93% of those folks have positive equity in their homes, which is the complete opposite of where we were last time," he said.
"They have the opportunity to potentially refinance their loan if they are temporarily out of a job or if they have to, they can at least sell the home at a profit and get a fresh start, whereas if you go back to 2008, a lot of the borrowers that were in foreclosure just really had no alternative other than to lose the property to a foreclosure sale," Sharga added. "Right now there's a very, very small percentage of people experiencing that."