Foreclosures are surging now that Covid mortgage bailouts are ending, but they're still at low levels

As government and private sector programs meant to assist homeowners in dealing with the economic fallout from the Covid-19 pandemic, foreclosures are on the rise.
The third quarter saw a 32% increase in foreclosures by mortgage lenders on 25,209 properties. According to ATTOM, a mortgage data company, this is a 67% increase year-over-year.

Despite the dramatic rise in foreclosures, they are still far below the extreme lows created by forbearance programs. The number of new foreclosures, also called starts, is usually around 40,000 per monthly. They dropped to between 3,000 and 4,000 during the initial year of the pandemic when the forbearance program was in full effect.

Borrowers in financial difficulty could delay their monthly payments up to 18 months by using both government and private sector relief programs. You could add the missed payments to the loan term or repay the mortgage when the house is sold or the mortgage is refinanced.

The states with the highest number of foreclosures were:

California: 3,434

Texas 2,827

Florida: 2,546

New York: 1,363

Illinois: 1,362

Rick Sharga (executive vice president, RealtyTrac), an ATTOM company, stated that despite the increase in foreclosure activity in September we are still well below historical normal numbers.

September foreclosure activity was almost 70% lower than it was pre-pandemic. The total foreclosure activity is still 60% less than it was one year ago.

Sharga said that the debate over whether the rise in foreclosures is indicative of a larger problem or a return to normal levels is one of the biggest issues facing the industry.

Many borrowers are leaving forbearance programs. Last week was the most significant weekly drop. According to Black Knight, an analytics and mortgage data firm, the number of borrowers participating in bailout programs fell 11% from week to week.

There were 177,000 fewer active forbearance programs, mainly due to a 84,000-plan decrease in FHA/VA loans. Nearly 1.4 million borrowers were still in pandemic-related plans as of Oct. 5. This represents 2.6% of all active mortgages.

Most people who are able to get out of the plan are now current with their payments. Those who are behind on their payments can work with lenders to modify their loan. Those who don't contact their lenders, or can't afford payments, may sell their home or go into foreclosure.

Due to aggressive modifications by lenders, and high levels of equity due to the recent housing boom that has resulted in high home prices and a consequently low foreclosure rate, the foreclosure rates should remain relatively low. CoreLogic reported that prices rose by more than 18% in August compared to the previous year.

David Stevens, ex-CEO of the Mortgage Bankers Association, and former FHA commissioner under the Obama administration, stated that he believes the "forbearance rock" will be minimal.

The Great Recession saw home prices drop by approximately 20%, but this recession saw home values increase roughly the same. While there may be some foreclosures, it is likely that they will be much smaller on a percentage basis. This could be due to the ability of a homeowner to either sell the house or default.

According to Sharga, foreclosure numbers will likely rise through the end-of-this year and then return to normal levels in the middle of next.

He said that although they may tick up a bit more than usual, they still remain far below the tsunami we witnessed during the Great Recession at the end of next years.

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