A foreclosure wave looms in 2021 because millions of Americans have stopped paying their mortgages

  • Reports of a looming foreclosure wave have been a feature of the coronavirus pandemic, as many homeowners looked to the CARES Act for mortgage-payment relief. 
  • The CARES Act rescue package gives 180 days of mortgage relief to homeowners with federally backed mortgages, along with the option for another 180.
  • CoreLogic found that as of August, 6.6% of all mortgages, or about 3.3 million, were in some stage of delinquency.
  • CoreLogic's chief economist, Frank Nothaft, told Business Insider most of those delinquencies were protected by the CARES Act, meaning their grace periods will end as early as spring.
  • Visit Business Insider's homepage for more stories.

The housing market has been described as a bright spot throughout the pandemic — but there's a dark side. For some borrowers, the market is singing a somber tune as the calendar approaches 2021.

The trouble has to do with delinquencies — the term for when a mortgage borrower is over 30 days late on their payment.

In a usual year, a delinquency soon leads to a foreclosure, as the bank that provided the mortgage seizes the property. The word "foreclosure" evokes the aftermath of the Great Recession, when the subprime-mortgage crisis triggered a wave of foreclosures and threw millions out of their homes. But 2020 isn't a usual year.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, which took effect in March, protects borrowers with federally backed mortgages by offering 180 days of mortgage relief that can be extended to an additional 180 days, according to the Conference of State Bank Supervisors, a national regulatory organization. This provision has kept foreclosures low, but delinquencies are starting to get high.

A leading housing-data provider, CoreLogic, just found that one slice of the delinquency market hit a benchmark not seen in decades. A full 1.2% of encompassed loans were 150 to 180 days past due as of August, the highest the rate has been since 1999.

In all, the report found 6.6% of mortgages in the US were in some stage of delinquency, including those in foreclosure. That is equivalent to about 3.3 million mortgages, 2.9% more than in August 2019.

The CARES Act provisions have kept the foreclosure-inventory rate low, at 0.3%, the lowest rate since 1999, but the serious-delinquency rate, of loans 90 days or more past due, was 4.3%, the highest since February 2014.

"Forbearance must be granted upon receiving a request for forbearance from a borrower and the borrower's attestation to a financial hardship caused by the COVID-19 emergency," the Conference of State Bank Supervisors website said. "The CARES Act mandates that the forbearance period for borrowers with COVID-related hardships can last as long as two consecutive 180-day periods."

A replay of the foreclosure wave from the Great Recession?

If no other federal level of support is implemented, grace periods will start ending in 2021 for these 3.3 million borrowers in forbearance, depending on when they entered forbearance.

According to CoreLogic's chief economist, Frank Nothaft, what happens will depend on the state of the economy, more specifically, the unemployment rate, which dropped to 6.9% in October. Of the 93% who are employed and earning income, Nothaft said "what a great time it is to access the mortgage market and buy a home." For the roughly 7% who are out of work and have been for months, he said it was a very stressful time, especially when you throw a monthly mortgage payment into the mix.

There are two likely scenarios when the grace periods begin to end, Nothaft said: Borrowers will be able to get back to work and make the money needed to make the payments on the modified loans, or their local economy will be weak and they won't be able to earn the necessary income.

Foreclosures were at their highest in 2010 during the Great Recession, when 2.9 million homes ended up in foreclosure. That means 2021 could have a similar, even higher, number of filings, but Nothaft doesn't expect it to grow anywhere near as high.

He acknowledged the foreclosure rate was expected to go up in 2021 but said homeowners have higher levels of home equity than during the Great Recession, which puts the state of the market at a much stronger standing this time around.

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