Hartford Courant (Sunday)

A new foreclosur­e crisis is coming

But should be mild compared with Great Recession, when home prices collapsed and millions endured the loss of their homes

- By Jeff Ostrowski Bankrate.com

The coronaviru­s recession is all but certain to cause a spike in foreclosur­es. A prominent housing analyst expects hundreds of thousands of defaults next year as mortgage forbearanc­e periods end. The federal government predicts several billion dollars in loan losses at Fannie Mae and Freddie Mac, the mortgage giants that hold twothirds of American mortgages.

At first glance, those projection­s look bad. On closer inspection, however, this round of foreclosur­es should be mild in comparison with the financial carnage of 2008 to 2010.

“We aren’t thinking the housing market today is going to suffer anywhere near the catastroph­e that it suffered during the Great Recession,” says Ralph McLaughlin, chief economist at Haus, a financial technology company. “We all suffer from recency bias, but I can’t stress enough how different it is.”

During the last recession, a frenzy of foolish lending, reckless borrowing and rampant speculatio­n set the housing market up for a wrenching crash. Home prices collapsed, and millions endured the loss of their homes.

Entering this recession, by contrast, credit standards remained tight, and the housing market was healthy. The COVID-19 pandemic will lead to a rise in mortgage defaults and foreclosur­es. But as the housing market muscles through this economic downturn, it looks as if foreclosur­es will form a trickle rather than a flood, housing experts say.

Foreclosur­es will rise

ATTOM Data Solutions says at least 200,000 American homeowners are

likely to default next year. If the economic downturn is especially severe, the foreclosur­e count could range as high as 500,000 homes. Todd Teta, ATTOM Data Solutions chief product and technology officer, expects a 70% increase in foreclosur­es over the next two years.

As dramatic as the projection­s seem, it’s worth noting that foreclosur­es had fallen to record lows in late 2019. Home prices had risen steadily in the past decade, driven by a strong economy and not enough new constructi­on to satisfy demand.

During the Great Recession, foreclosur­e filings spiked. In the first half of 2010, 1.65 million American homes went into foreclosur­e, according to ATTOM. In the first half of 2020, barely 165,000 loans were hit with foreclosur­e actions. Even if defaults rise dramatical­ly, they’ll remain

well below the levels seen during the mortgage meltdown.

In another warning, the Federal Housing Finance Agency, the overseer of Fannie Mae and Freddie Mac, says the coronaviru­s recession will cause loan losses at those government­backed entities to jump by more than $4 billion.

That sum, which represents thousands of homeowners defaulting on their loans, sounds like a lot — until you consider that Fannie and Freddie hold a combined $6 trillion in loans. In other words, the anticipate­d defaults represent only “a tiny fraction” of mortgages, says Lynn Reaser, chief economist at Point Loma Nazarene University in San Diego.

Why foreclosur­es are different this time

How can a sharp economic downturn, one that caused unemployme­nt to

soar to historic highs, cause only a blip in foreclosur­e activity?

One answer is that American homeowners have built up large reserves of home equity.

The situation was the opposite in the Great Recession. Leading up to the crisis, lenders doled out mortgages with zero down payments. “Liar loans” didn’t require borrowers to prove their ability to repay. When home values crashed, homeowners had little incentive to keep paying their mortgages.

Home values have held steady, with bidding wars erupting in many parts of the country as Americans who still have jobs vie for bigger homes better suited to pandemic living. That means more troubled borrowers can escape foreclosur­e by selling.

“Unlike the Great Recession, home prices in most markets are rising,” Reaser

says. “This means that people’s equity is also up, which will reduce the incentive for them to give up their home if it can possibly be avoided.”

A quick government response

McLaughlin says the federal government’s slow reaction to the Great Recession exacerbate­d that crisis. Unemployme­nt benefits provided only subsistenc­e levels of income, and the HARP and HAMP foreclosur­e programs weren’t fully up and running until two years after the recession began.

In a response McLaughlin calls “night-and-day different,” the federal government reacted quickly and aggressive­ly to the COVID recession. Jobless workers received $600 a week on top of their state unemployme­nt benefits. And the terms of the federal forbearanc­e program were generous — borrowers can stop making mortgage payments for up to a year with no penalties. Many private lenders followed suit.

Indeed, lenders seem to have no stomach for a repeat of the foreclosur­e crisis of the Great Recession. Default filings clogged court systems, and the clumsy response led Washington to impose strict regulation­s on mortgage lending.

During the aftermath of the pandemic, lenders are positionin­g for a morecooper­ative, less-punitive approach, says Bernadette Kogler, co-founder of RiskSpan, a data analytics firm.

“The industry is going to do a better job of keeping people in homes,” Kogler says. “This time around, it feels like the mortgage finance industry is part of the solution, and not part of the problem, like it was in 2008.”

How forbearanc­e works

Generous forbearanc­e programs — which give borrowers a break from payments — have helped stave off foreclosur­es. How the relief works:

You have to ask. Borrowers must request forbearanc­e. Don’t stop making payments without checking in with your lender or servicer.

Qualifying is relatively easy. Lenders aren’t demanding proof of hardship.

There’s no penalty. Missed payments during forbearanc­e won’t hurt your credit score, and you won’t accrue late charges.

You still owe the money. Forbearanc­e pauses payments by extending the length of your loan. After the grace period ends, you’ll resume making regular payments, but the term of your loan will be extended to include the payments you missed.

 ?? DREAMSTIME ?? A foreclosur­e crisis is coming, but experts predict it will be mild in comparison to the financial carnage of 2008 to 2010.
DREAMSTIME A foreclosur­e crisis is coming, but experts predict it will be mild in comparison to the financial carnage of 2008 to 2010.

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