Recently, the Federal Housing Finance Administration (FHFA) – conservative of Fannie Mae and Freddie Mac – extended the moratorium on evictions and foreclosures until the end of the year. Many owners breathed a sigh of relief.
Indeed, in recent months, the number of borrowers with active abstentions has decreased. But that’s no reason to be optimistic. The more serious question is how many landlords are now delinquent. By the end of 2020, several million borrowers who have benefited from mortgage forbearance will have gone nine months without making a mortgage payment.
At the peak of this activity at the end of 2007, over 10 million of these mortgages were outstanding with a total debt of over $ 2.4 trillion. As of early 2018, 25% of all delinquent borrowers across the country had not made a mortgage payment for at least five years. In New York State, New Jersey, and Washington, DC, this percentage was over 40%.
Keep in mind that these extremely high crime rates existed long before the outbreak of the COVID-19 pandemic. Since March of this year, subprime mortgage default rates have reversed a 10-year decline and climbed to 23.7% in July, according to the most recent report from TCW’s Mortgage Market Monitor. Other mortgage default rates in the prime bubble era were also significantly higher.
According to Inside Mortgage Finance, mortgage managers alleviated the pain of owners of these unsecured mortgage-backed securities (RMBS) by arguing for delinquency and interest. But in TCW’s latest report, nearly a third of those overdue payments had not been advanced to homeowners by the end of July.
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The 2010 Dodd-Frank legislation attempted to address the issues that led to the housing collapse. He created a new standard for substandard loans, which were named unskilled (non-QM) mortgages. These were mortgages that did not meet Fannie Mae or Freddie Mac’s underwriting standards and therefore could not be guaranteed by them. The default rate for these mortgages soared during COVID-19 lockdowns and stood at 21.3% at the end of June.
As for Fannie Mae, $ 203 billion in loans guaranteed by them were in forbearance as of June 30. New York, Florida and New Jersey had double-digit abstention rates. Of the $ 100 billion in bubble-era loans still guaranteed by Fannie Mae, 15% were withheld. In its second quarter 2020 10-Q financial report, the agency showed $ 194 billion in seriously overdue loans with arrears of more than 90 days.
Major subways, including Chicago, Philadelphia and New York, have seen an increased percentage of reduced ticket prices.
Skeptics may wonder why I am so concerned about these high rates of delinquency. After all, subprime mortgage default rates were much higher during the 2008-2010 crash. Plus, house prices have picked up since 2012 and prices haven’t even started to drop yet. So what’s the problem?
This is a fair question. Obviously, prices have recovered since 2013. But this recovery is completely artificial. Mortgage managers are just as reluctant to exclude severely delinquent borrowers as they were between 2010 and 2013.
Media reports are euphoric about the strong recovery in the housing market in recent months. In truth, home sales in the United States were only 5% higher in July than a year earlier, according to online broker Redfin. In New York, sales in July slumped 35% from July 2019. Worse in New York, listings soared 65% in July as residents continued to flee the lockdown calamity in the Big Apple .
A telling figure is the percentage of home sellers who had to lower their asking price in August. San Francisco posted the highest percentage of reduced asking prices since Redfin started following it – 24.5%. Other major subways, including Chicago, Philadelphia and New York, also saw an increase in the percentage of reduced ticket prices over the previous year.
Denver – one of the hottest markets in the country a few years ago – dominated the country in August, with 41% of home sellers being forced to lower their asking price. Another former hot market – Seattle – was the second highest at 31% along with Tampa, Florida. These are signs of weakening markets.
The current housing and mortgage mess is the result of something we’ve never seen before – a foreclosure of most of the US economy.
It’s critical to understand that the current housing and mortgage mess is the result of something we’ve never seen before – a lockdown of most of the US economy for six months now, with little ending. in sight.
How bad is it now? The online broker Apartment List publishes a monthly survey of around 4,000 tenants and landlords. The most recent survey released in early August found that 33% of those polled had not been able to pay the full rent or mortgage in the first week of August. That was a 21% increase in April. At the beginning of August, 32% of those surveyed had unpaid housing bills from previous months. For homeowners with mortgage arrears, 13% of them owed more than $ 2,000.
By extending the foreclosure moratorium until the end of 2020, the FHFA appeared to indicate that it was not ready to open the foreclosure floodgates. It may be true; they are not prepared to let the military take hold while the pandemic is still with us. Yet COVID-related deaths and hospitalizations have been steadily declining in the country for nearly four months. If this trend continues, it’s hard to see how the states with the most drastic lockdowns – including New York and California – can crack down on it for much longer.
What could happen when states finally lift their lockdowns? First, the apparent strength of the housing market in most major metros was caused more by the drop in active real estate listings than by low interest rates. Falling interest rates resulted in record refinancing. Although hundreds of thousands of residents of major subways such as New York, San Francisco and Los Angeles have fled to greener and less disruptive places, the collapse of the lists indicates that most have chosen not to put their homes down. on the market. This will likely change soon. This may already be happening in New York.
Second, small homeowners have been devastated by the lockdowns. The results of the latest survey released by the National Association of Independent Landlords (NAIL) found that the percentage of respondents who received full rent payment from their tenants fell to 55% in June from 83% in February. Almost 20% had vacant rental properties due to COVID-19, while 60% were able to offer some sort of payment plan to tenants to pay off the rent.
Keep in mind that at least 15 million properties are owned by these small owners across the country. Many were in a precarious financial situation even before the lockdowns began. Unless their tenants’ employment situation improves, millions of these investors could be wiped out and forced to throw their properties on the market. Sooner or later the bagpiper has to be paid.
Keith Jurow is a real estate analyst covering the bubble-era home lending debacle and its aftermath. Contact him at www.keithjurow.com.
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