Foreclosure Crisis Won't Be A Buying Opportunity

11 Replies

I have been saying for a while that I don't foresee the mortgage forbearance and foreclosure moratorium turning into a foreclosure crisis. There are three reasons:

1. Some people have the money ,but took forbearance as a way to save us cash. They are on sound financial ground and they will either pay the balance due or work out a plan with their mortgage company. They were never in trouble, but taking forbearance makes it appear they were. 

2. Some people will choose to sell. In most every market prices have skyrocketed since COVID. Even if you purchased a property two years ago, you probably have substantial equity. Why would someone let a property go to foreclosure, when they could just sell it and walk away with cash?

3. The federal government is dedicated to stopping foreclosure and has multiple programs in place to help people. I included a link to details of the programs, but it includes some of the following:

a. FHA will require mortgage servicers to give no cost options for borrowers to resume their old payment without forcing payment of missed payments. For borrower unable to resume, they will offer up to 25% reduction in payment. The outstanding balance is added at the end of the loan as a zero percent loan attaching a subordinate lien on the property. This means they don't have to pay the money back until the property is sold or property is refinanced.

b. Direct mortgage payment assistance through the Homeowner Assistance Fund. This is almost $10 billion allocated to pay mortgage payments, utilities and insurance. Home owners can use these funds in conjunction with other programs to wipe away unpaid bills with no repayment.

c. Government is created a new security product for modified loans through GNMA that allows loan modification out to 40 years. This allows borrowers behind on their mortgages to extend the term and lower the payment.

COVID is the biggest money grab in US history, handing out trillions of dollars in assistance and hundreds of billions to the housing industry. There is no way for this to turn into a crisis. Look at the facts:

- People have not had housing expenses for a year

- Even those out of work had considerable government aid during that time

- Employers are begging people to come back to work at higher wages today

- Those who need to resume payments don't need to repay the unpaid money until they sell

- Some people can get their debt paid and others can get their payment reduced by 25%

- Loan terms can be extended to 40 years to reduce payments

- Over a hundred billion is being passed out to pay landlords who were shorted rent

- In most cases the house is worth far more than before the pandemic, so you have an asset worth more money

I just don't see how this ends badly in the short term. As far as the government spending, that will have medium to long term affects. 

Here are the details on the programs available.  
Fact Sheet: Biden Administration Announces Additional Actions to Prevent Foreclosures | The White House

@Joe Splitrock I think #2 is the most likely reason against a crisis. 

It's hard to see equity disappearing with a massive lack of supply (in many markets), high construction costs and low interest rates.

All of this makes sense...if you believe the government has any real idea of how to run this...they never have, and they never will.  Somehow, someway, they will figure out a way to drag out all of these programs and in the process divert these funds to other areas accidently (on purpose).  The bureaucracy that is our government, will rise to the occasion, and screw this up...as usual.  Yet, somehow, they will keep getting reelected (because the problem is always with the other guy).

They always talk a good game, make promises they have no real chance of keeping, and end up just kicking the can down the road (I give you Exhibit A:  Our national debt).  I would love to believe that what you wrote will come true, it all makes perfect "cents", but after many years (too many) of watching empty promises, my fear as that it will end the end cost us more "dollars".

...but, I could be wrong.  Stay tuned.  Same Bat time, same Bat channel.



Originally posted by Will Gaston:

@Joe Splitrock I think #2 is the most likely reason against a crisis. 

It's hard to see equity disappearing with a massive lack of supply (in many markets), high construction costs and low interest rates.

Those are other good points. Low interest rates also open options for people to refinance. 

Originally posted by @Joe Splitrock :

I have been saying for a while that I don't foresee the mortgage forbearance and foreclosure moratorium turning into a foreclosure crisis. There are three reasons:

1. Some people have the money ,but took forbearance as a way to save us cash. They are on sound financial ground and they will either pay the balance due or work out a plan with their mortgage company. They were never in trouble, but taking forbearance makes it appear they were. 

2. Some people will choose to sell. In most every market prices have skyrocketed since COVID. Even if you purchased a property two years ago, you probably have substantial equity. Why would someone let a property go to foreclosure, when they could just sell it and walk away with cash?

3. The federal government is dedicated to stopping foreclosure and has multiple programs in place to help people. I included a link to details of the programs, but it includes some of the following:

a. FHA will require mortgage servicers to give no cost options for borrowers to resume their old payment without forcing payment of missed payments. For borrower unable to resume, they will offer up to 25% reduction in payment. The outstanding balance is added at the end of the loan as a zero percent loan attaching a subordinate lien on the property. This means they don't have to pay the money back until the property is sold or property is refinanced.

b. Direct mortgage payment assistance through the Homeowner Assistance Fund. This is almost $10 billion allocated to pay mortgage payments, utilities and insurance. Home owners can use these funds in conjunction with other programs to wipe away unpaid bills with no repayment.

c. Government is created a new security product for modified loans through GNMA that allows loan modification out to 40 years. This allows borrowers behind on their mortgages to extend the term and lower the payment.

COVID is the biggest money grab in US history, handing out trillions of dollars in assistance and hundreds of billions to the housing industry. There is no way for this to turn into a crisis. Look at the facts:

- People have not had housing expenses for a year

- Even those out of work had considerable government aid during that time

- Employers are begging people to come back to work at higher wages today

- Those who need to resume payments don't need to repay the unpaid money until they sell

- Some people can get their debt paid and others can get their payment reduced by 25%

- Loan terms can be extended to 40 years to reduce payments

- Over a hundred billion is being passed out to pay landlords who were shorted rent

- In most cases the house is worth far more than before the pandemic, so you have an asset worth more money

I just don't see how this ends badly in the short term. As far as the government spending, that will have medium to long term affects. 

Here are the details on the programs available.  
Fact Sheet: Biden Administration Announces Additional Actions to Prevent Foreclosures | The White House

I agree with the basics of what you post and alas, that will lead us into Stagflation. The market ultimately works regardless and that is why the government can't control the economy. If you grab a bowl of Jello with your hand, you can't contain it, it squirts out between your fingers. There are always unintended consequences.

We will have ongoing supply shortages at high prices and business margins will be squeezed causing considerable layoffs. People already have been rewarded to not work, so now it's natural to rely on the government when laid off. But, because of serious looming inflation, daily costs will be driven up. When that hits main street, people will be paying too much for rent, gasoline and bread. Unemployment checks won't keep pace and so it will spiral until it all breaks.

Plus, a black swan event is right around the corner. I don't know what it will be this time, that's why it's called a "black" swan, but it always occurs. It will be the tale of two groups, 1. those who prepare before hand and 2. the newly minted serfs who will be wards of the state and sometimes have their economic needs met. The middle class will be a fond memory.

@Mike Hern , the technical points made about the different government programs that will kick in to help stave off mass evictions are well taken. But I have been in real estate for a long time and lived through the housing crisis in 2007 and beyond. One thing being overlooked is the mental state of an individual who begins to think they can live in a house without paying for it. They get used to not paying and it is habit forming. I went through a similar scenario where I had tenants that refused to pay rent because they said they were out of work because of recession. Courts were very sympathetic and I found myself with an average time period of 6-8 months of no rent before I was able to legally remove them. Point being when people don't pay they develop a weird sense of entitlement and this whole eviction moratorium will end in a disaster. Lots of people homeless, ruined credit scores, houses in disrepair etc. Very few people have the skills to fully navigate the bureaucracy of these programs. Hence the $47 billion allocated nationally for rent assistance and only a few billion spent so far. This will all end in tears. There will be few smart people ready to take advantage of the opportunity when it happens as always.

My experiences is that while the national economy, interest rates, and policy are incredibly relevant to what I do, I also have zero influence over them. Worrying about things I have no control over is a direct path to unhappiness. But this is just my experience. 

The best response I can have is to focus on what I do have some influence over...buying great deals and focusing on improving relationships in my market. 

If I can buy 100k house for 50k then I think it'll all be okay. 

Originally posted by Mike Hern:
Originally posted by @Joe Splitrock :

I have been saying for a while that I don't foresee the mortgage forbearance and foreclosure moratorium turning into a foreclosure crisis. There are three reasons:

1. Some people have the money ,but took forbearance as a way to save us cash. They are on sound financial ground and they will either pay the balance due or work out a plan with their mortgage company. They were never in trouble, but taking forbearance makes it appear they were. 

2. Some people will choose to sell. In most every market prices have skyrocketed since COVID. Even if you purchased a property two years ago, you probably have substantial equity. Why would someone let a property go to foreclosure, when they could just sell it and walk away with cash?

3. The federal government is dedicated to stopping foreclosure and has multiple programs in place to help people. I included a link to details of the programs, but it includes some of the following:

a. FHA will require mortgage servicers to give no cost options for borrowers to resume their old payment without forcing payment of missed payments. For borrower unable to resume, they will offer up to 25% reduction in payment. The outstanding balance is added at the end of the loan as a zero percent loan attaching a subordinate lien on the property. This means they don't have to pay the money back until the property is sold or property is refinanced.

b. Direct mortgage payment assistance through the Homeowner Assistance Fund. This is almost $10 billion allocated to pay mortgage payments, utilities and insurance. Home owners can use these funds in conjunction with other programs to wipe away unpaid bills with no repayment.

c. Government is created a new security product for modified loans through GNMA that allows loan modification out to 40 years. This allows borrowers behind on their mortgages to extend the term and lower the payment.

COVID is the biggest money grab in US history, handing out trillions of dollars in assistance and hundreds of billions to the housing industry. There is no way for this to turn into a crisis. Look at the facts:

- People have not had housing expenses for a year

- Even those out of work had considerable government aid during that time

- Employers are begging people to come back to work at higher wages today

- Those who need to resume payments don't need to repay the unpaid money until they sell

- Some people can get their debt paid and others can get their payment reduced by 25%

- Loan terms can be extended to 40 years to reduce payments

- Over a hundred billion is being passed out to pay landlords who were shorted rent

- In most cases the house is worth far more than before the pandemic, so you have an asset worth more money

I just don't see how this ends badly in the short term. As far as the government spending, that will have medium to long term affects. 

Here are the details on the programs available.  
Fact Sheet: Biden Administration Announces Additional Actions to Prevent Foreclosures | The White House

I agree with the basics of what you post and alas, that will lead us into Stagflation. The market ultimately works regardless and that is why the government can't control the economy. If you grab a bowl of Jello with your hand, you can't contain it, it squirts out between your fingers. There are always unintended consequences.

We will have ongoing supply shortages at high prices and business margins will be squeezed causing considerable layoffs. People already have been rewarded to not work, so now it's natural to rely on the government when laid off. But, because of serious looming inflation, daily costs will be driven up. When that hits main street, people will be paying too much for rent, gasoline and bread. Unemployment checks won't keep pace and so it will spiral until it all breaks.

Plus, a black swan event is right around the corner. I don't know what it will be this time, that's why it's called a "black" swan, but it always occurs. It will be the tale of two groups, 1. those who prepare before hand and 2. the newly minted serfs who will be wards of the state and sometimes have their economic needs met. The middle class will be a fond memory.

I agree, it is just a matter of time before some unexpected event comes knocking. That event is just the catalyst to spark the next crisis. It happened in 1990 when Iraq invaded Kuwait. Gas prices doubled over night at the pump which directly lead to a recession because fuel prices effect the cost of everything, It happened in 2001 when the World Trade Center was attacked and over night everyone stopped spending money. When President Bush was asked, what can people do to help their country, he said "go spend money". That also sparked a recession. There is a real threat today of further COVID threat pushing us into economic despair. Regardless, I do think the massive amount of government spending is enough fuel for this economy to rid on for a couple years at least. Still I agree that it is important to be prepared for anything that happens. 

I honestly think that the supply / demand balance is already correcting due to price increases. I don't see businesses suffering. I see them raising prices and consumers are paying it. In my city wages are also going up quickly. 

Originally posted by Vincent Stewart:

@Mike Hern , the technical points made about the different government programs that will kick in to help stave off mass evictions are well taken. But I have been in real estate for a long time and lived through the housing crisis in 2007 and beyond. One thing being overlooked is the mental state of an individual who begins to think they can live in a house without paying for it. They get used to not paying and it is habit forming. I went through a similar scenario where I had tenants that refused to pay rent because they said they were out of work because of recession. Courts were very sympathetic and I found myself with an average time period of 6-8 months of no rent before I was able to legally remove them. Point being when people don't pay they develop a weird sense of entitlement and this whole eviction moratorium will end in a disaster. Lots of people homeless, ruined credit scores, houses in disrepair etc. Very few people have the skills to fully navigate the bureaucracy of these programs. Hence the $47 billion allocated nationally for rent assistance and only a few billion spent so far. This will all end in tears. There will be few smart people ready to take advantage of the opportunity when it happens as always.

Point well taken. This is why I advocated for removing the eviction moratorium. There is a subset of people who will not bother getting assistance until they are forced into a corner. The entire reason we courts and the prison system is to settle disputes and offer consequences. Eviction is a consequence of not paying rent. 

I also lived through the housing crisis and I will say the federal government handled that much differently. They were very slow to respond with help. The loan modification programs didn't come until after foreclosures were out of control. My friend was a realtor and they had people trying to short sale houses, but they couldn't. Houses that could have sold $5000 short of the loan ended up getting foreclosed on and sat vacant for a year. Then they sold $20K under loan value... They revamped so many rules and now with COVID the money and programs have come before people are in foreclosure. Totally different situation than the housing crisis. We also have low supply, where in the housing crisis we had excess supply.

Originally posted by Will Gaston:

My experiences is that while the national economy, interest rates, and policy are incredibly relevant to what I do, I also have zero influence over them. Worrying about things I have no control over is a direct path to unhappiness. But this is just my experience. 

The best response I can have is to focus on what I do have some influence over...buying great deals and focusing on improving relationships in my market. 

If I can buy 100k house for 50k then I think it'll all be okay. 

In an hot market, if I can buy a $100,000 house for $97,000 and rent it for good money, I will do that too. If the market changes and those houses are now $50K, then I will just buy two. It is really a matter of making the best of the current situation. 

I think the point of my original post was trying to show people that waiting can be a fools game. People wait for a crash and then the same people get worried and wait for recovery. Other people wait for something that will never happen. The point is not taking action has hurt more investors than any natural or man made disaster. 

@Joe Splitrock I will agree to disagree.

1. Your first point is very possible.

2. I agree that some people will choose to sell but there are two main issues that I think go against this line of thinking. If people were smart enough to sell rather than be foreclosed on, then why are homes always being foreclosed on? Often people in these situations are not in a capable state to handle a home, and do not have the foresight to sell prior to the bank seizing their property. In a perfect world I would agree.

Additionally, the issue isn't so much the foreclosures. Foreclosures have been halted for quite some time causing a false inflated sense of scarcity in the housing market. This in turn has caused the prices of all homes to skyrocket past anything considered reasonable. Now the fed has continued to lower interest rates in an attempt to stimulate spending thus allowing people to afford larger mortgages without actually having more buying power or cash on hand. So people are further driving up the prices of houses.
Now the issues arrises when any foreclosures being, cause this then falls on the bank as a default mortgage, thus its revenue they thought they would have to disappear overnight. Thus in turn, they will become more cautious on who they give mortgages too, and give out less mortgages in general. In turn demand will dwindle to somewhat, causing house prices to fall. Now you have all these new home buyers who bought a 600k home with a 700k mortgage on it stuck, and basically underwater on their home purchase.

Now couple in inflation, it's just a series of dominos that fall one after the other until the bottom falls out at some point.

3. I understand that there are government plans to help people, but pushing it on the taxpayers only increases inflation and ruins the value of the dollar and the overall market.

I don't see how this doesn't affect the world, either we have crazy inflation or a crash in the housing market, or dominos slowly leading to a black swan.

This will not be exactly like 2008, as it is now a different situation, but with record inflation, and the supposed 3 trillion infrastructure deal I am worried.

I do hope I am wrong...

Originally posted by Joshua Moore:

@Joe Splitrock I will agree to disagree.

1. Your first point is very possible.

2. I agree that some people will choose to sell but there are two main issues that I think go against this line of thinking. If people were smart enough to sell rather than be foreclosed on, then why are homes always being foreclosed on? Often people in these situations are not in a capable state to handle a home, and do not have the foresight to sell prior to the bank seizing their property. In a perfect world I would agree.

Additionally, the issue isn't so much the foreclosures. Foreclosures have been halted for quite some time causing a false inflated sense of scarcity in the housing market. This in turn has caused the prices of all homes to skyrocket past anything considered reasonable. Now the fed has continued to lower interest rates in an attempt to stimulate spending thus allowing people to afford larger mortgages without actually having more buying power or cash on hand. So people are further driving up the prices of houses.
Now the issues arrises when any foreclosures being, cause this then falls on the bank as a default mortgage, thus its revenue they thought they would have to disappear overnight. Thus in turn, they will become more cautious on who they give mortgages too, and give out less mortgages in general. In turn demand will dwindle to somewhat, causing house prices to fall. Now you have all these new home buyers who bought a 600k home with a 700k mortgage on it stuck, and basically underwater on their home purchase.

Now couple in inflation, it's just a series of dominos that fall one after the other until the bottom falls out at some point.

3. I understand that there are government plans to help people, but pushing it on the taxpayers only increases inflation and ruins the value of the dollar and the overall market.

I don't see how this doesn't affect the world, either we have crazy inflation or a crash in the housing market, or dominos slowly leading to a black swan.

This will not be exactly like 2008, as it is now a different situation, but with record inflation, and the supposed 3 trillion infrastructure deal I am worried.

I do hope I am wrong...

@Joshua Moore that is a fair point that there are always foreclosures. No matter matter what programs or increased value a house may have, there is going to be some people who just shut down, stop paying or walk away.  That is a small number of people and increased values provide financial motivation that normally isn't there.

We do not have "record inflation". Look back through history and you will see cycles of much worse and prolonged inflation have happened multiple times. The entire 1970's were marked with higher inflation than we have right now. Even with double digit inflation, the economy can expand. 

Inflation by itself is not a bad thing and it is actually necessary. When it becomes a problem is when wages lag behind or the economy starts to suffer due to lack of spending. That can lead to higher unemployment and recession. 

Maybe I am just biased with my local market, but my state has record low unemployment and help wanted signs everywhere. Even with higher prices, businesses have lines of people. Even offering $15 starting, they still can't find help. This is not 2008 and it is not the late 1970's. It is more like the roaring 20's.

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