With the foreclosure moratorium ending, the only thing keeping many homeowners in their homes is a forbearance plan. Once those end, the effects on the market could be drastic. The good thing is that it’s easy to predict when that will happen, since forbearance plans have a designated end date. Many of them have already ended in the past two months, but we will continue to see more ending throughout the rest of the year.
One of the effects of a large increase in foreclosures or forced sales is plain to see, and that is an increase in inventory. With inventory being so low right now, one could be forgiven for thinking that’s what the market needs. But it most certainly is not. Let’s take a look at the reasons demand is so high right now: low interest rates, and the fear-of-missing-out (FOMO) mentality that buyers have when inventory is low. Interest rates are going back up now, so that’s no longer an incentive to buy. If inventory increases drastically, FOMO won’t be a factor either. Foreclosures and forced sales will remove all incentive to purchase while increasing inventory considerably, causing a full swing in the market. But that’s not all. People living in foreclosed-on homes aren’t just statistics; they are actual people, and their increased economic struggles will only make it more difficult to reach a recovery point in the recession.
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Foreclosure and eviction moratoriums for FHA-backed loans were previously set to expire December 31st, 2020. The FHA has now given them a two-month extension to February 28th, 2021. Borrowers will also be able to request initial forbearance through this date, potentially allowing them to remain in forbearance through February 2022. The moratorium applies only to legal occupants of single-family residences.
This extension means FHA moratoriums are extended beyond the FHFA moratoriums affecting those with loans backed by Fannie Mae or Freddie Mac. Those were also recently extended, but only through January 31st, 2021. Of course, given how recent that extension was, it’s entirely possible FHFA borrowers will also get another extension in the future if needed.
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Here in California, the foreclosure moratorium is set to end in February. The federal government has now caught up with California, with the FHFA extending the federal moratorium through January 31, 2021. It was previously set to expire at the end of December. The FHFA will be keeping tabs on what’s happening and continue to provide extensions as needed.
More than 28 million homeowners in the US have an Enterprise-backed mortgage, so the hope is that this extension helps a lot of people. FHFA Director Mark Calabria wanted to make sure borrowers had peace of mind during the pandemic. Fannie Mae and Freddie Mac are expected to incur between $1.1 billion and $1.7 billion in additional expenses between now and January 31, in addition to the approximately $6 billion they’ve already incurred during the moratorium.
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SB 1079, also known as “Homes for Homeowners, Not Corporations” has now been signed into law, and becomes effective January 1, 2021. The law seeks to balance out the advantages that corporations and Wall Street have in bulk purchasing foreclosed homes. We saw the devastating effects of this type of corporate greed during the Great Recession, and California lawmakers don’t want a repeat of that.
To this end, the new law does a couple things. Firstly, bulk purchasing is much more difficult, as bundle auctions will no longer be allowed except as permitted by security instruments. Second, eligible bidders and tenant buyers will have 45 days after the trustee sale to beat out the highest bid. Importantly, not listed among eligible bidders are for-profit corporations. Also of note, an eligible tenant buyer need only match, not exceed, the highest bid, and if they do so before the trustee sale ends, the sale is final. Though it doesn’t affect chances of homeownership, SB 1079 also increases fines for owners failing to maintain vacant properties.
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Currently, approximately 4 million homeowners in the US are in forbearance, which means that the lender has agreed to delay foreclosure on a property. Many others are delinquent in their payments and will be suffering the consequences when the foreclosure moratorium ends in February 2021. It may be too late for some of these people, but if you act quickly enough, you may be able to avoid the most serious of complications by utilizing a strategic default, also known as voluntary foreclosure or, more colloquially, the “jingle mail” strategy.
In a strategic default, the homeowner voluntarily initiates a foreclosure on their home in exchange for avoiding responsibility for some of the debt owed. When this happens, the homeowner is not responsible for what is called nonrecourse debt, which includes a mortgage funding the purchase or construction of an owner-occupied residence with no more than four units, as well as credit sales in which debt is secured solely by the sale of real estate. Even if the debt is recourse debt, the mortgage holder may or may not be able to pursue the homeowner for the loss. Be aware, however, that there are some drawbacks to a strategic default. It comes with a significant drop to one’s credit score, which can make securing new loans and finding a new home more difficult.
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The CARES Act, signed into law in March, provides multiple benefits to those impacted by the COVID-19 pandemic, including a moratorium on most foreclosures. On August 24, real estate journal First Tuesday pondered what may happen beginning August 31, when the CARES Act was set to expire. However, it was announced August 27 that the moratorium has been extended through December 31.
Even had the moratorium not been extended, First Tuesday said not to panic. The foreclosure process would have to start from the beginning, and it takes time, so homeowners would not be evicted overnight. That said, it’s important that state legislators make efforts to soften the blow even after the federal moratorium ends. Just like foreclosures won’t happen overnight, nor will affected parties recover overnight. Fortunately, there is a statewide bill for California, AB 2501, that seeks to extend it for another 12 months as well as offer forbearance.
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As a result of the COVID-19 outbreak, the Federal Housing Finance Agency (FHFA), which regulates Fannie Mae and Freddie Mac (the Enterprises), had instituted a moratorium on foreclosures and evictions for Enterprise-backed single-family mortgages. The moratorium was scheduled to end on June 30th, but on June 17th, the FHFA announced that the date will be extended to August 31st. The FHFA plans to continue to monitor the situation and make further adjustments as needed.
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