How the Mortgage Forbearance Program Changed the Market

In 2020, many experts feared the housing market would crash. They believed job loss and economic uncertainty would lead to high numbers of foreclosures, similar to when the housing bubble burst nearly 15 years ago. 

Fortunately, the COVID-19 Forbearance program provided much-needed relief for homeowners and avoided another foreclosure crisis.

Mortgage Forbearance

The forbearance program allowed homeowners to postpone their mortgage payments for up to a year without accruing late fees or affecting their credit score. This allowed people time to get back on their feet after losing their job or having their hours reduced. It allowed them to stay in their homes and avoid the stress of finding new housing amid a pandemic. 

The program helped prevent a foreclosure crisis by giving lenders confidence that homeowners would be able to make their payments once the forbearance period ended. In other words, it prevented borrowers from defaulting on their loans in large amounts, which would have been disastrous for both the economy and the housing market. 

Ultimately, the forbearance program successfully prevented a housing market crash and stabilized the economy during a time of great upheaval.

Most Homeowners Have Successfully Exited 

As of June 2020, nearly five million homeowners had taken advantage of forbearance plans. 

While this is a staggering number, it's important to remember that forbearance has helped to prevent even more families from losing their homes to foreclosure. 

Forbearance has been a lifeline for many families during the pandemic and has helped stabilize the housing market during a time of turmoil.

Most homeowners in forbearance can stay in their homes thanks to the modifications, deferral, and workout options in place. These options allow homeowners to make payments that are more manageable for them. 

As a result, four out of every five homeowners are either paid in full or exiting with a plan; this shows that these options are working well and helping homeowners stay in their homes.

Why We Won't See a Wave of Foreclosures

For many months now, there has been speculation about whether or not we will see a wave of foreclosures due to the COVID-19 pandemic. 

While it is true that the foreclosure moratorium has been lifted, and there has been a slight increase in foreclosures since then, it is essential to remember that foreclosures today are still nowhere near the levels seen during the housing crisis. 

This is partly because so many people have been able to stay in their homes and work out alternative payment arrangements. As a result, it is unlikely that we will see a significant increase in foreclosures shortly.

Lending Standards

Lending standards have significantly improved since the housing bubble burst, and that's one more reason foreclosure filings are relatively low. 

Borrowers must now provide extensive documentation of their income and assets and typically make a down payment of at least 20 percent. 

As a result of these requirements, today's borrowers are much more qualified to pay their home loans - another reason why foreclosures are now at historic lows.

Homeowners Have Options

And while most homeowners are exiting the forbearance program, for those who still need to make a change due to financial hardship or other challenges, today's record-level of equity allows them to sell their houses and avoid foreclosure altogether. 

Today, homeowners have options not available during the 2008 housing crisis when many people owed more on their mortgages than what their homes were worth.

With our current high demand for homes, even homeowners that owe more on their mortgage than what their home is worth can still sell it and pocket enough cash to pay off the mortgage. And if they have enough equity, they can sell and use that cash as a down payment on another home. 

The Bottom Line

The bottom line is that homeowners have options today that simply didn't exist during the housing crisis of 2008, allowing them to avoid foreclosure altogether. The forbearance program has been a game changer for homeowners in need. And while the program is not without its critics, it's one of the big reasons we won't see a mass of foreclosures coming to the market.