Is a big wave of foreclosures on the way?

Question

In short, I don't think so. If you don't agree, please provide some insight and fill me in on what I am missing.

There are two big clues that a foreclosure wave is not imminent. The first clue is in the first quarter 2021 10-Q filing from Fannie Mae, FNMA, one of the largest loan providers with $4.1 Trillion in assets. On page 16. under Single-Family Benefit (Provision) for Credit Losses, FNMA states:

• The primary factors that contributed to our single-family benefit for credit losses in the first quarter of 2021 were:
•    Benefit from actual and expected home price growth  (details on page 6)
•    Benefit from the redesignation of certain reperforming single-family loans from HFI to HFS (details in Note 4, page 89)
•    Benefit from changes in assumptions regarding COVID-19 forbearance and change in actual and expected loan delinquencies

The net effect was that their single-family allowance for loan losses, page 89, dropped in 2021Q1. Page 83 shows total single family delinquencies of $117 Billion on $3,354 Billion of loans, or 3.49%. Page 84 shows that 9.5% of their loans are collateralized with a LTV of 80% or more. A smaller total loan loss reserve does not indicate that a substantial wave of foreclosures is imminent. After this event-based recession, a majority of those in default hold better cards than after the Great Recession. Any time a loan is reperforming, that's a good sign for FNMA, borrowers, and the overall industry.

The second clue is summarized by the following graph, showing the post Great Recession trend in Foreclosure and Substitute Trustee filings. If you didn't know there was a pandemic, you probably couldn't identify where the foreclosure moratorium started and ended. I contend that Wake county data is a good enough proxy for a big enough chunk of the US hosing market. Yes, there will be local and regional deviations, but overall I see no sign of a substantial reversal of the long term trend. I would expect second half 2021 (2H2021) numbers to rise, but no where near the levels we saw a decade ago.

Chris Martin · Answer

I expect this will be my last post on this topic. Those who called for a huge spike in foreclosures (and I'm talking about the local  people in the local NC areas, specifically the Raleigh (Wake county) area) at the end of the foreclosure moratorium were profoundly mistaken. The facts are S-TR filings over the past several years are small enough to say that my exiting the courthouse buying rat race about 6 years ago was probably one of the best moves I've made in my RE career.

People pump out lots of noise about real estate. Follow the facts and trends and most of the time you'll get to the right answer.

Chris Martin · Answer

From what I can tell, the official foreclosure 'moratorium' ended at the end of July. BoA, Wells, JPM, and others have indicated through unofficial channels (meaning there is no significance to their press releases) they will not initiate foreclosures until later this year or in 2022, but from what I can tell, this is not mandated by law. With all the executive orders, I can't tell anymore what 'law' is and what isn't. That said, ... drum roll please... the S-TR filings in JULY in Wake county was .... 26. Two of these are from 2020. I didn't look at all the D-Ts but suspect that the defendants (defaulted borrowers) had non-GSE loans.

Today, the first day that a lender could file w/o a moratorium mandate, there were zero S-TR filings in Wake county.

Account Closed · Answer

I don't think a wave of foreclosures is coming. The government will step in with some form of mandate, like they have with mortgage moratoriums and eviction moratoriums. But, it's like a balloon being squeezed, the squeeze pushes the balloon out in unpredictable and seemingly random ways.

I predict stagflation like in the 1970's. Very uncomforatable for people in  a lot of ways. A lot of people will lose their jobs, (again) and not be able to pay rent & mortgages (again) and a lot of landlords will say "enough is enough" and walk away from a losing battle, leaving the properties vacant or to the bank if there is a mortgage, depressing values.

The banks won't be able to sell their REOs and will be paid by the government to provide low income housing because there will be so many unemployed and unhoused. It will change smart investing (the kind you and I do) entirely, and investors will have to adapt or perish. The big question will be "adapt in which way?". That is to be determined in the next couple of years.

Account Closed · Answer

Agreed. I don't see another 2008 event for quite a long while. The banks have wised up to the issues they created and don't see those lessons being forgotten for some time. The majority of loans are well positioned and should not lead to a foreclosure issue. That said, I do think we are going to see an uptick in foreclosures due to the government finally lifting the ban on the foreclosure process. Unfortunately, there have been people affected by the virus and their places of employments have had to downsize or shut down completely. This will lead to an increase in foreclosures, but should be relative to the economy bouncing back. Would be helpful if the government would stop incentivizing people to stay home and on the couch.