Homeowners in the U.S. were offered extraordinary protections to weather the economic fallout of the COVID-19 pandemic. First, there was a blanket moratorium on foreclosures of government-backed loans. In addition, homeowners could apply for forbearance for up to 18 months, avoiding any mortgage payments over this time.
Both programs are being wound down, but there always is the possibility that either could be extended. That scenario, however, would probably lead to unintended consequences, said Daren Blomquist, vice president of market economics at Auction.com, an online platform for buyers and sellers of distressed properties.
“While these programs have been extremely effective for the type of economic shock we experienced, the mistake could be extending them for too long or becoming too enamored with these programs,” said Blomquist, who spoke to Scotsman Guide about why foreclosures are a necessary function of a healthy housing market. He also discussed ways to phase out mitigation programs and the potential consequences of allowing them to linger.
Will the housing-inventory shortage prevent problems with the ending of forbearance?
The housing-inventory shortage will definitely cushion the blow that could have come at the end of forbearance. The folks who are exiting forbearance, who unfortunately have not regained their jobs, will still have that option if needed to sell their home, to avoid foreclosure and sell it not as a short sale but as an equity sale.
What’s the best way to phase out these programs?
Certainly, we want it to err on the side of being overprotective for homeowners in trouble. Removing the foreclosure moratorium will motivate anybody who has not taken advantage of forbearance yet to say, ‘OK, well, I could actually be foreclosed [upon] now.’
The forbearance program funnels homeowners into a more proactive approach than the foreclosure moratorium … We’ve seen the extensions be effective at diminishing the number of homeowners who are still at risk. At one point, it was over 5 million homeowners in forbearance and now that’s close to 2 million.
What unintended consequences could occur for the housing market as borrowers exit these programs?
You have this buildup of homeowners who are getting deeper and deeper into delinquency, and falling further behind on their mortgages. The longer that goes, the harder it is for them to dig out of that hole once [the moratoriums] end.
They’re actually losing equity. The principal, the interest payments, taxes and insurance payments get added on to their loan balance. Their loan balance actually gets higher. It’s almost like a negative-amortizing loan, eroding equity.
Certainly, we want it to err on the side of being overprotective for homeowners in trouble.
What could happen if the federal government allows these programs to continue?
It could actually backfire and hurt homeowners. If these programs are extended too long, you would see homeowners who are actually put in a position where it’s harder to avoid foreclosure because they’ve lost equity in their home. They have a deeper hole to dig out of in terms of their missed payments.
Job loss is the usual cause for a foreclosure, right?
There are a variety of things that can cause it, but it is typically the result of a job loss. Foreclosure is a necessary function of a healthy housing market that relies on financing for people to purchase a home. The lender needs to have a recourse in the event the loan is not paid. Some people might say we should have no foreclosures, which you could do, but then you would not have financing. It would become an all-cash housing market.
You need the stick for the carrot-and-stick approach to work?
Exactly. Foreclosure is the recourse, or the stick, in the financing system that is necessary for it to function. Most people have accepted that as part of the benefit of having financing available to purchase a home. ●