When Will the Foreclosure Wave From the Pandemic Hit?

02 Aug When Will the Foreclosure Wave From the Pandemic Hit?

A lot of real estate investors and agents have been asking me in recent days when there will be a wave of foreclosures caused by defaults due to the COVID-19 shutdown. The answer is, it depends. Some cities, regions, and states have been affected more than others. Also, some states have a faster foreclosure process than others. The type of mortgage loan comes into play. Since people in the lowest income brackets have seen the most job losses in many areas, their housing situation can be most affected. Some foreclosures will be from landlords whose renters can’t pay. There are also potential foreclosures among landlords who chose to buy higher priced properties for Airbnb and VRBO rentals in vacation spots that are not being frequented by travelers for now.

There are some insights we can glean from studying data. I’ll present some, along with my opinions. Do your own research in your own market.

Forbearance delays, and prevents, foreclosure. The federal CARES Act allows borrowers with a federally-backed mortgage (FHA, Fannie Mae, Freddie Mac, VA, and USDA) to receive up to 12 months of forbearance as long as they request it before the end of 2020. That way borrowers can preserve their money during the pandemic and start paying their mortgage loan again when their finances are not so tight. About 62 percent of loans for 1-4 family properties (residential homes) are federally backed. About 9 percent of those mortgage holders (4.75 million borrowers at the peak in May 2020) are in forbearance currently. Most people who forbear their payments will get back on track. Those who do not will likely have foreclosure actions begin at the end of the 12-month period, which roughly would begin in the spring of 2021. States with a judicial foreclosure process will generally take longer – typically 18 months or more – meaning that the foreclosure auctions could climb in late 2022 and into 2023. States with a nonjudicial foreclosure process move faster – typically 6 months or less – meaning that a wave of foreclosures could happen in late 2021 and into 2022.

As for non-federally backed mortgages, including some conventional loans, all private loans, and all commercial loans, those borrowers who cannot keep paying will likely see foreclosure actions start within 90 days of the initial default. Many lenders are offering some type of forbearance or other mortgage relief. For instance, I noticed that some banks are offering three months of forbearance on their websites for those who do not have a federally-backed mortgage.

Commercial loan defaults could be the first wave. There is a lot of talk about imminent commercial loan defaults. Many businesses cannot continue operating, and that puts pressure on their landlords. Many malls are struggling, especially with the bankruptcies of major tenants like JC Penney, J. Crew, Neiman Marcus, Pier 1, Brooks Brothers, GNC, and Modell’s Sporting Goods. Movie theaters like AMC are running out of cash. Hotels are not seeing enough travelers either. Besides the malls, many office buildings are losing tenants as businesses realize they do not need as much space since people can work from home. Commercial Mortgage Backed Securities are losing value, causing concern among major investors.

As malls, big box stores, and office complexes go dark, their landlords will attempt to fill those spaces with other tenants. Tenants from Class B properties will move up to the vacant Class A properties. Tenants from Class C properties may move up to vacant Class B properties. That puts pressure on landlords of Class C and Class B properties too.

Keep in mind that commercial loans typically have balloon payments. With banks tightening their lending standards, and with businesses showing lower revenue, many companies and landlords may not qualify for new loans when the balloon is due. That increases risk across the spectrum of business owners, landlords, and banks.

One exogenous factor that could delay foreclosure actions would be a newly instituted state or federal moratorium on foreclosures. Keep an eye on the news coming out of Washington D.C. and your state capitol.

Individual landlords could bear the brunt of defaults. The vast majority of real estate investors own one rental house. I have seen data that indicates that upwards of 40 percent of low income workers recently lost their jobs. A number of the job losses are concentrated in retail, restaurant, and other service sectors. Many are tenants who therefore cannot pay their rent. Without the rent coming in, the landlords also are in trouble if they do not have sufficient capital reserves. Since most landlords do not have a federally-backed mortgage loan, they have fewer options for forbearance. With the expiration of the CARES Act eviction moratorium at the end of July 2020, CNBC reported on July 30, 2020 that up to 40 million Americans may lose their homes. That would be far worse than the Great Depression and the Great Recession.

Airbnb and VRBO rentals are significantly down in many areas, which puts financial pressure on those property owners. Many people who bought houses in popular tourist areas have seen a precipitous drop in travelers and what they are willing to pay. Many of those properties, if rented to a traditional long term tenant, would not produce a positive cash flow. Also, many people who previously rented out rooms in their own home for extra income are not doing so at the moment due to concerns about being infected with COVID-19 by a stranger. A wave of foreclosures could hit the landlords who rely upon short term rentals as early as this year.

Tenants do not want to be evicted. That’s bad for them and bad for the economy. Borrowers do not want to be foreclosed upon. That is also bad for everyone. Real estate investors and some move-in homebuyers naturally look for bargains. If they do purchase a foreclosure, the good thing is that many will spur economic growth by hiring contractors and buying materials from home improvement stores. Plus they will ultimately provide quality, affordable housing.

If you are a renter, landlord, or homeowner trying to avoid eviction or foreclosure, consider reading my book titled The Essential Guide to Keeping Your Home During a Financial Crisis. It has practical tips on how to work things out. It is available on Amazon here: https://www.amazon.com/Essential-Keeping-During-Financial-Crisis/dp/B087LH676W/ref=sr_1_1?dchild=1&keywords=tai+desa&qid=1596364560&sr=8-1

Tai DeSa is a graduate of The Wharton School of the University of Pennsylvania.  He became a full-time real estate investor in 2004 after serving in the U.S. Navy.  Tai has made colossal mistakes in investing (and learned some things along the way).  He has helped hundreds of homeowners avoid foreclosure through successful short sales. Check out Tai’s books on Amazon.com. Tai may be available for coaching and speaking engagements on a variety of real estate topics.  Send an email to tai@investandtransform.com.