Fresno Realtor Don Scordino stands in front of a four-bedroom house in Madera Ranchos that his clients purchased in this February 2020 file photo. Photo by David Castellon
Written by Edward Smith
A client of Fresno real estate agent Don Scordino reached out to him with concerns about a daughter who had fallen behind on her mortgage during the pandemic.
The homeowner was 10 payments behind. So, Scordino went through her paperwork and payment history. He found the homeowner had built $175,000 in equity into her home. He assured the homeowner that while she might not make all that back, even if foreclosure proceedings began, the value of her home had grown enough that she could sell it, pay off the remaining debt and walk away with a little cash. Scordino says this will be the case for most homeowners facing foreclosure coming out of the pandemic.
Across the nation, a foreclosure moratorium lifted at the end of July. Under federal law, however, those facing foreclosure can’t be evicted until the eviction moratorium is lifted. For California, that moratorium will lift Sept. 30.
But while consensus from experts says increased home equity levels and forbearance will prevent mass foreclosures as seen during the Great Recession, some are carefully watching for a bubble should speculation on the hot housing market continue.
“Not even during the worst of the Great Recession have so many borrowers been so far behind,” a press release in June from the Consumer Financial Protection Bureau stated. The CFPB published rules for lenders and borrowers as moratoria around the country were lifted.
Banks were instructed to allow borrowers to move missing mortgage payments to the end of their loan term in response to the millions out of work fro Covid shutdowns.
Nationwide, over 7 million homeowners went into forbearance with their lenders, according to a June 28 press release from the Consumer Financial Protection Bureau. Two million homeowners are still in forbearance and most are projected to be in forbearance for more than a year.
Foreclosure proceedings can begin once a borrower has missed four monthly payments, and over 3% of borrowers have reached that threshold, according to CFPB. At least 900,000 homeowners are projected to exit forbearance before the end of the year.
Despite the gloomy picture, experts say the housing market — driven largely by shortages in the market — has homeowners in a place where their homes are worth more than they owe. This means that they should be able to sell their homes at a price high enough to cover their note.
“We should not have a foreclosure crisis like we had before,” said Scordino.
Consistently low interest rates have most borrowers on fixed-rate terms. In the housing crisis, many borrowed using variable rates and the balance they owed actually increased as time went on, said Scordino. That’s not the case this time around.
Forbearance programs have been fairly successful, says Mark Vitner, managing director and senior economist with Wells Fargo Economics. Deferring mortgage payments was often the best solution for both lenders and borrowers.
While there will be foreclosures as some folks have drained their equity to support their lifestyles, Vitner said, it won’t “be a mountain.”
Current market conditions are reflective of demand and availability, as opposed to a bubble where values outpace natural laws of supply and demand.
“In a bubble, you have an increase in the speculative demand in housing,” Vitner said. “That’s just not taking place.”
The July 2019 median home price was $264,000 according to redfin.com. The July 2021 median home price was $337,750, up 13.7% from 2020.
People expect more out of their homes with remote work and for that reason, people aren’t downsizing.
“There’s this mismatch between buyers and sellers and new construction can’t make up the difference,” Vitner said.
Vitner, however, said he is keeping his eye on speculation in the market, which could create a bubble. Houses are selling far above assessed value, meaning that especially for first-time home buyers, they have to come up with significant levels of cash to compete for homes receiving dozens of offers.
Bubbles need fuel, said Vitner, and that fuel is money, often through a new innovation. In the Great Recession, liquidity was poured into the market by bundling mortgage-backed securities.
The only place where Vitner sees a lot of money being poured into housing is in single-family home rentals. And while Vitner says that may be a market that could use a bubble, it is an area he is watching.
Market forces have created some conditions that have favored owner-occupants over investors, Scordino says. Offers with the most cash are the ones typically being accepted, and that has made it harder for investors buying multiple properties to compete with owner-occupiers buying just one house.
“This is the market where the owner-occupant has the advantage over investors with cash,” Scordino said.
Some regions may also be more primed for speculation. A flexible work environment has allowed for workers to leave higher-priced areas for lower-priced areas.
Regardless, for the immediate future, experts don’t fear the lifting of an eviction moratorium.
“We should not have a foreclosure crisis like we had before because this time, most sellers have equity in their home, which gives them the option to sell or refinance to avoid foreclosure,” Scordino said.