A feared foreclosure surge seems less likely than some anticipate, according to research associates at the Urban Institute.
Flatlining forbearance rates have generated concern among members of the media, causing experts to predict that a large number of homeowners could face foreclosure in 2021.
"Some policymakers worry about what will happen at the end of forbearance to these borrowers and whether borrowers who have not regained their prior financial position will go into foreclosure," noted the institute's Michael Neal and Lori Goodman. "But this widespread forbearance won’t necessarily happen, even among government loan borrowers who have a higher risk of default due to higher-initial-loan to value ratios, higher debt-to-income ratios, lower credit scores, and lower incomes than borrowers using conventional loans."
They say that loss mitigation policies and substantial housing equity can keep foreclosures at bay in most states.
The two strong lines of defense are the "loss mitigation waterfall" and the amount of home equity that borrowers have accumulated thanks to home price appreciation.
Borrowers in government securities have an average 22% equity buffer, which is a saving factor for those homeowners, according to the Urban Institute's report.
According to the institute's analysis, the average borrower with a government loan has 22% equity.
Just 3,771 of about 626,000 delinquent or forborne borrowers; .6%, have negative equity. Most (2,817) are U.S. VA loans, many of which are originated with loan-to-value ratios above 100%. Fewer than 500 FHA and Rural Housing loans have negative equity.
In some states, the smaller home equity buffer may result in more foreclosures, note the authors.
They write, "The share of mortgages with negative equity values range from a low of 0.1% in several states to highs of 1.8% in Wisconsin and 1.4% in Illinois. The share of borrowers with negative equity or near-negative equity are mostly in the single digits, with only Wisconsin, Illinois, and Alaska exceeding 10%.
In analyzing the data, which can be read in full on urban.org, the researchers concluded that Americans will see far fewer foreclosures than they did after the Great Recession.
"The three-month extension of the forbearance period announced on February 9 was welcome news, as it gives struggling borrowers more time to benefit from improved employment prospects as the economy recovers and to build an equity cushion; this is particularly critical to homeowners without equity," UI reported. "A further extension may well be necessary."