Trouble ahead for the housing sector?

However, some of this house sector support will expire soon. The enrollment window for the mortgage forbearance program is set to close at the end of this month.¹ The national eviction moratorium was originally set to expire last December, but it was extended several times before the latest extension was vacated by the Supreme Court in August.² However, some state and local moratoriums remain in place. The last major backstop, the funds allocated to the Emergency Rental Assistance Program, were allocated to the states, but they are only now beginning to disburse the funds.

Given the large number of tenants behind on their rent, there is little doubt that the end of eviction moratoriums will result in a spike in evictions in coming months. However, what is less appreciated is how rental evictions might cause mortgage delinquencies and foreclosures to also rise, compounding the rise in foreclosures from those who are not able to pick up their mortgage payments when forbearance ends. Without the backstop of the pandemic mortgage forbearance program, the resources of the Emergency Rental Assistance Program will become essential to providing stability to both renters and property owners.

Forbearance provided a financial lifeline to millions of homeowners, but there might be transitional issues

Between March 2020 and June 2021, 9.3 million mortgage holders took advantage of the opportunity to skip some mortgage payments under the forbearance, with the peak occurring early in the pandemic in May 2020, when close to 2.5 million mortgages entered forbearance. However, just under 2 million mortgages, or only 21% of the total, remained in forbearance at the end of June 2021.³ Mortgage forbearance made a measurable impact on mortgage delinquency rates as mortgages that are granted forbearance are not recorded as delinquent. The forbearance program has therefore been instrumental in keeping number of foreclosures at record lows since its inception.⁴

While the forbearance option has reduced delinquencies and foreclosures and preserved credit ratings, the shift in the composition of those in forbearance may cause problems going forward as the pool has become more heavily weighted toward subprime borrowers, i.e., those with a credit score less than 620. As of June, subprime borrowers made up 39% of those in forbearance, substantially higher than their 18% share of the overall share of mortgages and up from their share of the forbearance pool a year ago, when they were 26% of the pool total.⁵ As noted in a Federal Reserve Bank of New York study, “Looking forward, those borrowers remaining in forbearance are the borrowers that will be most likely to struggle when these policies are lifted. Federally backed mortgages are eligible for up to eighteen months of forbearance, depending on when the initial forbearances started. With this limit in effect, many of the borrowers remaining in forbearance will face the limits of this leniency in the coming 3–4 months, when they must either resume payment or will be pressured to sell their homes to avoid delinquencies and consequent foreclosures.”⁶

Depending on how many of those still in forbearance status ultimately end up in foreclosure, the impact could be sizable. For example, if all the subprime mortgage holders currently in forbearance were to end up in foreclosure, that would be just under 780,000 foreclosures. Although certainly not anywhere near the levels of foreclosures seen during the global financial crisis, when the number topped 2.8 million in both 2009 and 2010, it could contribute to a sizeable rise over the 493,000 foreclosures that occurred in 2019.⁷

Another possible concern related to the end of pandemic mortgage forbearance is very much tied to the end of the other housing-related support, the eviction moratorium. In 2018 (the most recent ownership data available), individuals owned almost 20 million of the 48 million rental units in the United States, approximately 40%.⁸ As shown in figure 1, individual investors are concentrated in smaller properties, owning almost three-quarters of properties with less than five units. The loss of even a single tenant’s rent payment would likely stress these individual owners. And although a lower proportion of these smaller properties have mortgages (figure 2), individuals who own rental properties may have been using mortgage forbearance to cover either the rental property mortgage to the extent allowed⁹ or may have used the forbearance on their own home mortgages if they were unable to cover that payment due to the loss of income from rents.