The Foreclosure Wave That Didn't Happen
Or, the surprising success of policy
I remember talking with my bank colleagues in the early days of the pandemic about how our jobs had just changed. For at least the immediate future, no longer would we be working with a growth-oriented mindset, helping our customers to expand their businesses, create additional product lines, or acquire new properties. Instead, our jobs had suddenly become about helping our customers merely survive what was unfolding before us: a seriously challenging period of uncertainty and, inevitably, a prolonged economic plunge.
Or so we thought.
What actually happened was almost the opposite. I’m not saying that a lot of people have not had it particularly hard over the past two years. There are plenty of stories of struggle amid, of course, much worse stories of actual illness and death. And I don’t want to belittle or diminish those millions of stories of grief and sadness. But while it is true that the economy did drop into a sharp recession in the spring of 2020, a steady, stimulus-infused recovery then started almost immediately and certain economic metrics today are as strong as ever.
Consider this: ATTOM, which is a data tracking company that monitors foreclosure numbers, reports:
Foreclosure filings— default notices, scheduled auctions and bank repossessions — were reported on 151,153 U.S. properties in 2021, down 29 percent from 2020 and down 95 percent from a peak of nearly 2.9 million in 2010, to the lowest level since tracking began in 2005.
If you were to show policymakers the chart above in, say, April of 2020, and you said the biggest problems in the economy by January 2022 would be inflation and supply chain issues, most would probably take that trade off. The alternative was nothing less than the collapse of the housing market and with it the entire economy (see: 2008) as people potentially lost jobs, businesses closed, and the economy cratered.
So, what happened? If you believe that people being able to stay in their homes is a fundamentally good thing for our society and the economy as a whole, the record-low foreclosure statistic is a rousing policy success. And the policies that lead to it were multivariate.
Most importantly (and obviously) was the fact that there were federal restrictions on foreclosures built into the CARES Act. Initially homeowners could request 12 months of forbearance from their banks and that was then extended to 18 months. According to the non-partisan Government Accountability Office:
Use of the forbearance provision peaked in May 2020 at about 7 percent of all single-family mortgages (about 3.4 million) and gradually declined to about 5 percent by February 2021, according to GAO's analysis of the National Mortgage Database. As of February 2021, about half of all borrowers who used forbearance during the pandemic remained in forbearance.
What has also helped guard against increased foreclosures is the fact that U.S. consumers and homeowners, in particular, are doing pretty well right now thanks to a strengthening economy. Plus, at the outset of COVID the Federal Reserve immediately lowered interest rates to historically low levels, which gave buyers the opportunity to buy more due to the cheaper monthly payments, but also allowed millions of homeowners to refinance their existing mortgages, often saving hundreds of dollars a month on their existing home loans. Low rates also let businesses borrow more as you can simply take on more debt at, say, a 4.50% interest rate than you can at a 6.50% interest rate.
Second, several rounds of stimulus funds boosted and supported Americans’ household balance sheets, as most Americans received at least one direct stimulus check. Unemployment benefits were so-called “enhanced,” which allowed people who were out of work to still maintain some monthly cash flow. Plus businesses and non-profits received numerous opportunities for economic support including two rounds of PPP loans, which were meant to incentivize businesses to keep workers on their payrolls instead of laying them off but functioned simultaneously as a business relief program. And businesses were also eligible for EIDL loans, which were not forgivable like PPP loans, but did provide low-interest loans to businesses, which helped many stay afloat. Various other small stimulus programs provided by all levels of government (federal, state, and even municipal) also helped.*
*A definite case can be made that all of these policies are a part of the reason why inflation is running at its highest levels in 40 years, which is certainly not all a positive story.
And third, home values have been rapidly increasing in value, which has provided homeowners with more equity to potentially borrow against as a source of liquidity. Strong equity positions have also given homeowners leverage if they decide to sell (particularly in the face of potential foreclosure). As compared to 2008 when many homeowners were underwater, today homeowners are in a much stronger position to potentially sell and make a profit in the face of not being able to make their payments if they are experiencing financial distress. According to CoreLogic:
U.S. homeowners with mortgages (which account for roughly 63% of all properties) have seen their equity increase by 31.1% year over year, representing a collective equity gain of over $3.2 trillion, and an average gain of $56,700 per borrower, since the third quarter of 2020.
This summer, home price growth reached the highest level in more than 45 years, pushing equity gains to another record high.
CoreLogic also reports that only 2.1% of American homeowners have negative equity, which is what we typically think of as being “upside down” on a mortgage. This is a record low. Equity gains were solid around the entire country over the past year:
What Comes Next
Despite these successful positive initiatives, things like the foreclosure moratorium cannot go on forever. And, indeed, that particular policy expired in July 2021.
Policymakers in Washington have made other requirements to make it easier for homeowners coming out of forbearance to catch up on payments (and therefore avoid potential foreclosure) including making it so that banks cannot require mortgage holders to pay all of the deferred payments back at once and instead can spread them out over a longer period of time, which of course makes sense.
There is already evidence that with the end of the moratorium that foreclosures are back on the rise, but certainly not in any sort of way that would signify a wave of foreclosures. On the one one hand, foreclosures in September 2021 rose significantly over the previous quarter and the same quarter of the year in the year before (during which both periods the federal foreclosure moratorium was in place, so it’s not exactly an apples to apples comparison in either case). But on the other, September 2021 foreclosures were still 70% less than they were in September 2019, which is really the best comparable as it was the same month of the year but prior to COVID-19. So yes, foreclosures were rising this fall relative to earlier in 2021 and during the same time period in 2020, but throughout the fall and early winter of 2021, we were still at low levels of foreclosures nationwide historically speaking. The chart of quarterly foreclosures below shows a very modest uptick in the most recent quarters, but, again, certainly nothing that represents a “wave” of foreclosures taking place:
What the chart above shows to me is that the state of the U.S. housing market and the economic wellness of the average American homeowner both remain strong. How long that lasts is anyone’s guess, but as I’ve written before, I think the housing market still has legs to run. The variables that will eventually cool things off include impending rising interest rates and the inherent economic uncertainty that comes with a lingering pandemic and all manner of other political and economic variables. So in other words, stay tuned.
Ben Sprague lives and works in Bangor, Maine as a V.P./Commercial Lending Officer for Damariscotta-based First National Bank. He previously worked as an investment advisor and graduated from Harvard University in 2006. Ben can be reached at ben.sprague@thefirst.com or bsprague1@gmail.com. Follow Ben on Twitter, Facebook, or Instagram.
Weekly Round-Up
Here are a few things that caught my eye this week that I thought might interest you too:
On the state of the current housing market, Emily Badger writes in The New York Times with the same perspective that I have written about, which is that the housing market has room to run:
All of this may feel unsustainable — the tight inventory, the wild price growth, the dwindling affordability. Surely something’s got to give.
But what if that’s not exactly true? Or, at least, not true anytime soon for renters locked out of homeownership today or anyone worried about housing affordability. There’s probably no quick reprieve coming, no rollback in stratospheric home prices if you can just wait a little longer to jump in.
Economist Ali Wolf shares data showing that more millennials are looking to buy homes now than last year, which is a major variable putting wind in the sails of the housing market:
Here in Maine, rapidly growing Westbrook has approved plans for 116 more homes, via Portland Press Herald: https://www.pressherald.com/2022/01/19/116-homes-approved-in-westbrook/
And, in fact, building permits nationwide continue to rise:
On a completely different note, this tweet spoke to me:
One Good Read
Adam Smiley Poswolsky writes in Harvard Business Review about how employees are more highly engaged when they feel close connections to others in the workplace. This has been more challenging during the pandemic, when many workers (especially in office settings) are working from home. He writes:
In the wake of the pandemic and the vast shift to flexible work from anywhere policies, 65% of workers say they feel less connected to their coworkers. Employee disconnection is one of the main drivers of voluntary turnover, with lonely employees costing U.S. companies up to $406 billion a year..
…A 2019 report by The Institute of Leadership and Management found that building close relationshipswith colleagues was the most important factor in determining job satisfaction by 77% of respondents. Salary was eighth on the list. Gallup reports that only 30% of employees have a best friend at work, but those who do are seven times more engaged. Employees with a best friend at work are more likely to engage customers, produce better work, have higher well-being, and are less likely to get injured on the job. If employees don’t have a best friend at work, there’s only a 1 in 12 chance that they’ll be engaged.
One Good Listen
This week I stumbled upon a podcast called One Year, where the host takes the listener through various events and people that encapsulated a single year. The first season was on 1977, which I haven’t listened to yet. The second season is about 1995. The two episodes I have listened to so far were both very good:
Don’t laugh - we think back and cringe at certain pop culture phenomena like The Macarena, but this 58 minute podcast on it was fascinating including the origins of the song, arguments legal and otherwise about the rights to the music, and ongoing cultural impact. You should be able to find these podcast episodes wherever you listen to podcasts.
Got story ideas, news tips, or suggestions? Email me at ben.sprague@thefirst.com or bsprague1@gmail.com. Have a great week, everybody.