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No Tsunami Of Foreclosures This Time (5 Reasons)

At the beginning of the pandemic, I remember seeing a lot of posts from people on the BiggerPockets forums regarding an upcoming "tsunami" of foreclosures. They said, “Better be ready to take advantage of this opportunity!” I had my doubts back then but, the more time goes on, the more I think there won't be anything close to what we saw in 2009. Here are the reasons why I think this:


1. Underwriting for post 2009 loans was far stricter than last time.


Last time at the height of the craziness in 2005-2007, people nicknamed them “pulse” loans. As long as a person had a pulse or could fog up a mirror with their breath, they qualified for a loan.


We saw the results of that mindset when so many loans were made to people without any regard to whether they could actually pay them back. As defaults from uncreditworthy borrowers caused huge amounts of delinquencies, that cascaded and pulled others into the tsunami of defaults and foreclosures and dumped the housing market.


This Time is Different


Since 2009, there were probably some loans that shouldn't have been made but not nearly on the scale of pre-2009. The stories from 2009-2015 were about very high underwriting standards, where a lot of creditworthy borrowers couldn’t get loans. The pendulum had swung too far the other way.


After 2015, underwriting started to ease up and became more and more reasonable to a more “normal” state. Now, we have a better balance with most credit worthy borrowers being able to get credit to buy a home. Post 2009 loans have more credit worthy borrowers, in general, which have a better chance of dealing with delinquencies.


2. Government stimulus means more help for borrowers.


This time the stimulus came before the crisis. Lots of sources for borrowers in trouble to go to.

Stimulus came in the form of direct cash aid such as stimulus checks, PPP loans, SBA economic disaster loans, extended federal unemployment benefits, and a host of other programs at the federal, state, and county level.


The extra cash has allowed more borrowers to make their mortgage payments during these difficult, pandemic times.


3. Strong job market.


Currently, there are more jobs out there than people looking for them. When will it re-balance? Hard to tell. The last of the federal jobless benefits have been turned off.


(Here’s a good story about the topic in the Wall Street Journal.)




Lots of people retired early. I have a friend that works for Social Security and he said that he’s never been busier than during the pandemic. Much higher than normal amount of people retiring early. They lost their jobs or their businesses during the lockdowns and decided to retire early. Many of these folks are not coming back to the job market. Fantastic availability of jobs means it's easier for borrowers to earn money to pay their mortgages.


4. Strong real estate market.


For post 2009 borrowers, if you're in trouble and aren't getting help from the government or can't get a job, you most likely have equity in this frothy real estate market. You can sell your property, avoid foreclosure, and walk away with cash.


Hopefully, the real estate market will cool but I don't see it doing more than flatten. The COVID lockdowns prevented a lot of homebuilding and I think it'll take a while for supply to catch up.


5. Loan Modifications after Forebearance.


Ok, you didn't get enough stimulus, can't get the right job, but don't want to sell. You got a forbearance but still can't swing it. No worries, lenders are using a tool that they used last time: deferred principal. We'll just take the arrears and put it on the back of the loan for you.

This was very common from 2010-2012. Lenders made loans current by taking the arrearages, putting it on to the back of the loan, and called it deferred principal. This amount wasn’t charged any interest and was due when the loan was paid off during a sales transaction or refinance.


Anecdotal Evidence


I talked to a loan seller a few months ago and he said that they had prepared for a huge amount of incoming forbearance requests that never materialized. The actual amount of borrowers getting a forbearance was far lower than they expected.


Another friend who works for a big title company saw her workflow change from a huge amount of forbearances to a huge amount of loan modifications. She called multiple people to set up dates to sign closing documents. She would get these calls from confused borrowers who had no idea that their lenders were offering loan modifications to reduce their rates when they weren't in default and had never contacted the lender.


Conclusion


After 2009, government & big lenders did everything they could to dial down foreclosures and are better prepared for it this time. If we do see a surge in non performing notes, it will be absorbed by note funds and note investors. Yes, foreclosures will go up to a more normal level, maybe even higher, but it won't be anything like 2009.


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