Will foreclosures explode once the moratorium is lifted?

Landlords and lenders may need very deep pockets to outlast eviction, foreclosure hiatus.

Remember the nursery rhyme refrain, “We all fall down?”

The incredible uptick of COVID-19 is like a raging California wildfire. Earlier this week Dr. Anthony Fauci surmised the U.S. could experience 100,000 new coronavirus cases per day. With the U.S. population at roughly 337 million, it would take just over one year for everyone in the U.S. to get this virus if its trajectory doesn’t change.

Horrifying!

Assuming more Americans take hold of safer social distancing and other preventive practices and the miracle vaccine is just around the corner, maybe the COVID-19 trajectory drastically drops. Even so, how long can renters, homeowners, landlords and mortgage servicers hold out?

COVID-19 is a killer, in sickness and lives lost and financial health.

The U.S. had 119 million total households in 2017, 36% of which were renters , according to Richard Gollis, president of the Concord Group. It is not clear how exactly how many residential renters can’t pay their rent. Or, how many simply refuse to pay their rent.

To my knowledge, they refuse either because they are afraid of running out of money as their savings are dwindling or they fear an income cut.

On top of all that, the extra $600 per week of unemployment insurance goes bye-bye this month.

Since eviction is not an option for most landlords, some renters are strategic defaulters.

The Federal Housing Finance Agency recently extended the eviction moratorium for properties owned by Fannie and Freddie until Aug. 31, and Gov. Gavin Newsom extended California’s eviction moratorium through September 30.

Good luck to landlords collecting back rent from those strategic defaulters.

The same fears apply to property owners. Landlords may face the additional burden of their renters not ponying up. Domino effect indeed!

What we do know is that almost 8.5% of mortgage holders are in forbearance, according to the Mortgage Bankers Association’s most recent loan servicer survey. That number has been stable in recent weeks, but will quickly spike as lockdown orders return around the country.

Hence, more angst, less cash-flow, dwindling savings and another spike in business shutdowns and job losses are sure to follow. Not good!

The Cares Act offered mortgage payment forbearance for up to 12 months for all federally insured mortgages. Separately, no foreclosures on Fan or Fred loans until at least Aug. 31. About two-thirds of all mortgages are federally insured, according to the National Consumer Law Center.

California’s suspension of foreclosure actions remains in effect until 90 days after the pandemic emergency is lifted or the judicial authorities otherwise suspend the rules.

Locally, 2,663 properties in Los Angeles, Orange, Riverside and San Bernardino counties were in some stage of the foreclosure process as of January, according to Attom Data Solutions — meaning they either have received a notice of default, have an auction date set or have been foreclosed and reverted to the lender.  That’s up from an average of 2,438 properties in some stage of foreclosure.

Fast forward to May figures for those four Southern California counites. There were just 632 in the foreclosure process, or just one out of every 10,123 properties. That’s a 75% decrease, likely due to forbearance.

How long can the mortgage servicers hold out before they have to raise the white flag?

Mortgage servicers may need to advance up to $3.5 billion per month to holders of government-backed mortgage securities on COVID-19 related forbearances.

That’s on top of up to $1.4 billion in property tax and homeowner insurance payments that must be made on behalf of borrowers, according to Black Knight.

Mortgage servicers separately face up to $8.4 billion of P & I payment advances (four months of forbearance) to Fannie and Freddie, also according to Black Knight.

Once the foreclosure moratorium is lifted, will the foreclosure numbers explode?

“It’s hard to imagine anything but an increase, and possibly a big one-in foreclosures,” said Todd Teta, Attom’s chief product and technology officer.  “At some point, banks are going to need mortgage holders to pay what they owe and go after those who don’t.”

The longer it takes to corral COVID-19, the more I worry about the consequences for renters, landlords and lenders. COVID-19 may outlast the this extend-and-pretend strategy.We need a more sustainable solution — before we all fall-down.

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