It is hard to forget the image of entire street blocks jammed with foreclosure signs pushed into front lawns.
The shadow of the Great Recession hangs over the coronavirus crisis and it is easy to see why many assume that Americans will start losing their homes again, especially considering record unemployment and a host of economic problems related to COVID-19.
Housing analysts and economists largely agree though that it will be a long time before banks start selling homes. They say that the fear — or hope — of thousands of homes flooding the San Diego market might be misplaced.
As with the lion’s share of financial questions during the pandemic, answers to what will happen often depend on who you ask. But a repeat of thousands of San Diegans losing their homes like we saw during the Great Recession is largely brushed off by analysts because of two key factors: A host of options for loan holders that weren’t available during the last recession and, perhaps most importantly, the median home price in San Diego is high and homes can still be sold.
Unlike the years before the Great Recession when San Diego County had a surplus of homes being built, homebuilding continues to remain at historic lows. High demand for a limited number of houses has pushed the price up to a median price of $590,000 — nearly a record high.
The thinking goes something like this: Why would someone go into foreclosure when they could sell their home for a profit or, at the very least, break even or take a small loss? It’s not like 2008 when home prices dropped 35 percent in a year, leaving many homeowners owing more on their mortgage than their homes were worth.
Additionally, protections under the federal Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, should allow the majority of homeowners in the United States to delay mortgage payments for up to a year.
Even if the pandemic gets worse and drags down the economy, it will likely be a while before we see a notable uptick in foreclosures. After exhausting all the new federal options, it could potentially take years, because of a lengthy foreclosure process, before homes are sold off by banks again.
What the numbers show
Foreclosures in San Diego are practically nonexistent at the moment, making up 0.09 percent of homes.
But even the most optimistic viewer of the home market can’t deny some of the numbers look a little scary.
Take the number of borrowers who have asked to delay their mortgage payments temporarily because of a financial hardship, or who are in forbearance. That figure is on the rise compared to a few months ago before the economy was shut down during stay-at-home orders.
The Mortgage Bankers Association said about 8.47 percent of loans were in some sort of forbearance in mid-June compared to 0.25 percent in early March. The association started the forbearance survey in March as the pandemic began.
However, Marina Walsh, the association’s vice president of industry analysis, said the current numbers might actually look worse than they are. She said the association’s surveys found many borrowers who have requested forbearance during COVID-19 have done it as a form of insurance in case they lose their jobs — and have actually kept making payments.
“Fifty-five percent of those existing forbearance plans are those that have continued to pay their mortgages,” she said of recent developments.
Another key statistic to watch is the delinquency rate, which includes those already in foreclosure or in some type of forbearance. As of May 31, 6.9 percent of California mortgage borrowers were delinquent, said data analysts Black Knight. That’s a 228 percent increase in six months. Still, that is is not as bad as February 2010 when 15.7 percent of borrowers were delinquent.
And California’s current delinquency rate represents one of the lowest in the nation. San Diego metropolitan area’s delinquency rate is similar to the state total at 6.6 percent.
Black Knight, in its latest analysis, wrote that the highest delinquency rates were in Mississippi (12.7 percent), Louisiana (11.7 percent) and New York (11.3 percent). The lowest was Idaho at 4.4 percent.
Given this data, as well as unemployment numbers, many economic forecasts predict a small drop in prices, but nothing like what was seen during the Great Recession. Zillow’s economic research team predicts prices will decrease 1.8 percent by October, but recover slowly through 2021.
Of course, with the unpredictability of COVID-19, more lockdowns and economic impact could wreck havoc for years. Also, enhanced federal benefits that gave unemployed Americans $600 a week, and have been credited with helping the economy during the quarantine, are set to expire at the end of July.
Chris Thornberg, economist and founding partner of Beacon Economics, argues a major foreclosure crash even several years from now is unlikely. He said risky home loans given to people that could not afford homes caused the last recession, as opposed to this time being a near complete stoppage of the economy because of a pandemic.
He said most jobs should be considered furloughs because people are still supposed to return to work. As numerous economic studies have pointed out, the majority of people who lost jobs in this recession have been largely low-skilled, low-paid workers, so Thornberg argues those are mostly renters — especially in high-priced areas like San Diego.
“I’m not diminishing the plight of these folks. This is why we have incredibly generous unemployment benefits and have all sorts of systems to keep them stabilized,” he said,” but those people don’t own homes.”
Options for borrowers
In the Great Recession, there were fewer options for homeowners who were struggling than there are today. For the most part, banks have come to the conclusion it is cheaper to try and work with borrowers to stay in their homes.
Largely a result of efforts begun after several national disasters, many banks had established forbearance programs in place even before the pandemic. Most allow borrowers to take a break in payments for a period of time, tacking those payments onto the end of the loan — so you don’t end up having to pay a lump sum after a few months. Interest still accrues during the time not paying, but it avoids delinquent payments.
Under the CARES Act, most borrowers can go a year without making payments. There are a few caveats. The mortgage needs to be a federally backed loan (most are), but it should still affect most borrowers.
The foreclosure moratorium for federally backed loans has been extended into August, and it lasts for 12 months from when a borrower calls. The way it works in most situations: A borrower calls a bank and says they are having trouble paying their mortgage and gets a 90 day forbearance. If the financial situation is dire, the borrower can keep asking for another three months — and keep doing so for a year in total.
Since banks have different programs, and it might not be clear who owns your loan, a website has been established by Fannie Mae called KnowYourOptions.com. It has information on how to prepare for a call with your bank, as well as a “mortgage loan lookup” to help figure out who owns your loan.
So, what happens after the 12 months and a borrower still doesn’t have income needed to pay? Another option that was popularized after the Great Recession is a loan modification, whereby a bank reviews debt-to-income and other parts of a borrower’s changed financial situation to alter the loan.
That option can get very complicated because it typically only works if a bank still owns the mortgage, and the mortgage wasn’t sold on a secondary market. Like a short sale, where a buyer sells for less than the amount due on the mortgage, these are typically used when there aren’t many good options left.
Additionally, after forbearance, there are repayment plans — different from a deferral where missed payments are put at the end of the loan — to spread out missed payments.
Marina Walsh, of the Mortgage Bankers Association, said this is why she is confident it will take a long time before Americans start losing their homes because of the economic downturn.
“This is a multiple year issue,” she said. “We are not going to have, all of a sudden, a surge in foreclosures.”
Danielle McCoy, vice president of Fannie Mae, said the hope is once thousands of American borrowers leave forbearance they will review numerous options to repay, avoiding a massive crisis in the home market.
“When they are ready, (the hope is) they will work with their servicer to review a number of options to repay amounts due,” she said, “and find a solution that best fits their financial situation.”
You need to call
Much economic relief for COVID-19 happened automatically without people doing anything.
Stimulus checks went out without having to contact federal agencies, enhanced federal unemployment benefits usually automatically appeared after getting state unemployment, and federal student loans were paused without borrowers lifting a finger.
But, mortgage relief is different. If a borrower doesn’t call, or go online or into a branch, to request forbearance, nothing happens.
“They need to contact us,” said Susan Atran, spokeswoman for Bank of America. “The worst thing to do is to do nothing.”
A lot of banks have set up websites to explain options and allow borrowers to request forbearance. Bank of America’s Home Loan Payment Deferral & Forbearance page has links to request payment assistance online.
Martin Sanchez, a vice president of Wells Fargo’s western region, said the bank is going out of its way to try and reach borrowers who have yet to reach out.
“The goal during this time is to make it as easy as possible for them,” he said, “so they can focus on whatever bills they have and not worry about the mortgage.”
Sanchez said each borrower is different so it helps to understand unique situations. He said a borrower can request a forbearance easily online or do it over the phone. Similar to what the association said, he said some borrowers did request forbearance because they didn’t know what their employment situation would be, but continued making payments.
The Mortgage Bankers Association said it is anticipating a small increase in foreclosures in coming months but only because some people never called their bank.
Difference from Great Recession
San Diego County constructed a high number of homes in the years leading up to the Great Recession, but that has slowed considerably.
There were 17,306 housing units constructed in 2004, 15,258 in 2005, and 10,777 in 2006. San Diego County has not built more than 10,000 homes in a year ever since — despite a booming economy the last few years, coupled with high demand and a growing population. In 2019, there were 8,053 homes constructed, said the Real Estate Research Council of Southern California.
The tight housing supply has meant a limited number of homes for sale and has pushed the median home price ever higher. San Diego County isn’t alone in this, with home construction slowing nationally as the population grew during the recovery from the recession.
As of 2018, the United States was building fewer homes per household then at almost anytime in U.S. history, said an analysis of Federal Reserve data by The Wall Street Journal.
Demand for homes in San Diego County has meant price wars for limited supply — even with the coronavirus spreading throughout the nation. In May, after two months of a global pandemic, the median home price remained at record highs, $590,000 — an increase of 3.5 percent in a year.
While the price might drop somewhat, it isn’t expected by most forecasters to take a Great Recession-style dip. This remains the main reason why a wave of foreclosures in California is not expected, considering that those with financial problems could just sell and there will be a market for the home, unlike during the worst of the recession.
Haus, a real estate tech company, predicts home prices in the San Diego metro in June 2021 will have increased 1.8 percent in a year, around the same time many borrowers could potentially leave forbearance programs.
Haus chief economist Ralph McLaughlin wrote that the Federal Reserve’s efforts to keep interest rates low for several years will help keep demand up for purchases in the uncertain future. He wrote that federal support in the form of mortgage forbearance, increased unemployment and stimulus checks will help keep financially distressed homeowners in their homes without having to face foreclosure or a short sale.
“This will lead to much fewer distressed properties than during the Great Recession,” he wrote, “and as such, very little downward pressure on home prices.”
via San Diego Tribune