Foreclosures, short sales may rise post-pandemic

Real estate analysts are struggling to predict how the pandemic will affect the housing market. Many experts are forecasting a post-pandemic spike in foreclosures and short sales once forbearance programs have expired.

At the end of 2020, an estimated 2.8 million homeowners had mortgages in forbearance, according to Black Knight, a mortgage analytics company. Forbearance agreements allow homeowners to suspend their payments without penalties. While borrowers have permission to miss payments, these loans are still considered delinquent.

But what happens once forbearance programs expire? While lenders can’t require borrowers to make the back payments in one single lump sum, they may still require repayment plans in which borrowers have to “catch up” on missed payments. Many homeowners will not be able to handle the larger monthly obligation required to make these overdue payments.

Banks may provide loan modifications or payment deferrals that add missed payments onto the end of the mortgage term, without additional interest or late fees. A deferral option ensures that the borrower’s mortgage is current once they are back on their feet.
A report from ATTOM Data Solutions shows that U.S. foreclosures dropped to a 16-year low in 2020. Government programs put a halt to most foreclosure activity, and that means there’s a backlog of foreclosures building up.

But experts say the housing market will look very different than it did in the Great Recession. Home values have remained steady throughout the pandemic. That puts many homeowners in a good position in terms of home equity, and it means more troubled borrowers will be able to sell rather than go through foreclosure.

Still, an increase in short sales could create downward pressure on home prices, and therefore equity, as the market sees an uptick in distressed sales.