Cofounder of InstaLend, a non-bank real estate lender providing loans on single-family and multi-family properties for acquisition and rehab.
At the beginning of the Covid-19 pandemic, massive job loss and record-high unemployment filings were the immediate economic concerns. Then came housing. With the majority of Americans seeing their income drastically reduced, the ability to make mortgage payments was severely at risk.
To counter the immediate problem, the CDC and federal and state governments issued eviction and foreclosure moratoriums to prevent tenants and homeowners from losing the roofs over their heads and buy many Americans time. However, reduced payment plans and forbearance may prove to be a temporary fix to the real issue.
It’s hard to predict what will happen when the federal foreclosure ban ends at the end of June 2021. Real estate investors who relied on foreclosure properties in the past have had a significant drop in supply over the past year. Will there be a flood of foreclosure properties, or will added protections keep inventory down?
The pandemic hit Americans’ wallets differently.
It’s no secret the economic strain caused by the pandemic has affected Americans in different ways. For the most part, middle- to upper-class individuals with secure employment hardly saw a change in their income. In contrast, lower-income earners have been hit the hardest.
Some workers not deemed essential lost their jobs altogether, while scores of essential workers have seen their hours cut and, in turn, their income reduced. For those already at risk financially, living paycheck to paycheck, this drop in income has created a snowball effect. Temporary relief may be delaying an avalanche of deferred payments and interest.
The eviction and foreclosure ban provides a temporary solution. However, this is only a band-aid approach. Once it’s removed, the problem may be worse.
Homeowners have foreclosure relief — for now.
In normal circumstances, missed payments lead to foreclosure. In 2020, missed payments did not have any impact on homemowners and their credit. Both foreclosures and missed payment marks on credit have been put on hold. Foreclosure filings in 2020 represented just 0.16% of all U.S. housing units, or 214,323 properties, according to Attom Data Solutions.
It’s hard to predict what will happen when the foreclosure moratorium ends. Every loan is unique, and every lender is navigating these times differently. One lender may not require payments at all in the meantime and defer them to the future. Another lender may accept a reduced payment plan based on the impact to the homeowner’s income.
What’s often overlooked is the other areas where Americans have had to put off financial responsibility. Home repairs, auto repairs and delinquent utilities will all need to be addressed.
When foreclosures resume, it’s difficult to know how each lender will work to get accounts current. Many fear lenders will require the entire differed balance to be paid immediately. Although a gradual repayment is more likely, families’ added financial burden emerging from economic hardship will be a strain.
Will there be a flood of foreclosures when the ban ends?
Analysts have warned against a false sense of security during the Covid-19 pandemic. In my experience, requests for credit counseling have been low, which generally would be a good sign. However, because homeowners may not be proactively searching for remediation to their upcoming housing situation, we may be getting mixed signals.
In September of 2020, there was a brief lapse in the foreclosure and eviction ban. In one day, Allegheny County in Pennsylvania reportedly saw more than 180 eviction filings. Perhaps it was a sign that tenants and homeowners are not in as good of shape as previously thought.
Still, homeowners may have a better chance than expected of keeping their homes once the foreclosure ban ends. Banks may seek alternatives to the arduous process of foreclosing on a home, taking over the house and trying to sell it. Although not a guarantee, as every lender is different, refinancing lenders may work out options and restructured payment plans to keep people in their homes.
Chances are real estate investors can expect the inventory of foreclosure properties to increase back to normal or even surpass previous years’ supply.
Investors should be prepared.
In an effort to help economic recovery, the Federal Reserve has stated it intends to keep interest rates low for the time being. This could extend well beyond the pandemic and the foreclosure ban.
Investors looking to snatch up foreclosure properties flooding the market should be prepared to act quickly. With many investors frustrated by the lack of inventory and increased competition, that competition will remain even with an influx of properties.
Working with a lender, investors can obtain the financing they need quickly. Using this time to gather the necessary financials and documents will make securing funds easier when the foreclosure ban does end.