Wolf Richter points out that COVID-19-related, legally enforced forbearance on rent payments and mortgage loan repayments has created a hangover of properties that are far in arrears on what’s owed. Those forbearance measures can’t continue forever. When they end, those mortgage defaults may trigger a massive wave of sell-offs in parts of the housing market, which might dramatically reduce property prices and values.
On the other side of the red-hot housing market, a historic delinquency problem has been fermenting since last spring, largely put on ice and on hold by forbearance programs, waiting to be dealt with. The Federal Housing Administration (FHA) which insures nearly 8 million high-risk mortgages, reported that the delinquency rate of its mortgages rose to 17.5% in February, up from 17.0% in January, matching the all-time records of September and November last year, according to the AEI’s Housing Center.
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Rumors of perma-forbearance are now floating around, given the multiple extensions of the forbearance programs that no one has any political appetite to let expire. But those are just rumors. Eventually, those programs will end, and then the delinquent mortgages will have to be dealt with.
Borrowers who can do so will resume making payments, either with the missed principal and interest added to the end of the mortgage, or with the lender agreeing to modify the mortgage … Borrowers who cannot or don’t want to make mortgage payments can sell the home and use the proceeds to pay off the mortgage, including the missed interest payments. If the borrower fails to sell the home and pay off the mortgage, the lender can foreclose and sell the home. In either case, those homes are going to show up on the market.
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But in markets with a large concentration of delinquent FHA mortgages, this would unleash a flood of homes coming on the market – and it would instantly cure, and more than cure, the inventory shortage now being lamented, and when large enough, the sudden supply of homes for sale would send bigger ripple effects through the market.
That’s why no one is eager to let the forbearance programs expire, and why it’s so hard to get out of this extend-and-pretend phase.
The AEI Housing Center identified 10 metros that are most at risk of this sudden supply of homes, with delinquent FHA mortgages showing up on the market … For example, in the Houston metro (#2), 48,483 FHA mortgages are delinquent, or 22.5% of all FHA mortgages in the market. Of them, 32,224 mortgages are “seriously delinquent.” This creates the potential that tens of thousands of homes flood the market over a relatively short period of time.
And those delinquent mortgages are just FHA-insured mortgages and do not include other delinquent mortgages.
There’s more at the link.
If you’re a prospective seller at the moment, this implies you should sell your property quickly, before a wave of “default selling” hits the market. On the other hand, if you’re a buyer, you might do better to wait, in the expectation that housing prices will decrease under the impact of forced sales.
If there is a wave of forced selling, I expect major investment firms to take advantage of it to increase their property holdings, as happened after the last housing crisis. That doesn’t bode well for private home ownership, as such firms don’t want families to own their own homes. They want families to rent from them instead, giving them a permanent income stream with less risk than investing in stocks and bonds.
Fortunately, I’m not planning to buy or sell property in the near future, so I can sit back and observe. Sadly, there are some who don’t have that luxury.