Efforts at federal and local levels to help homeowners into forbearance rather than foreclosure have been enormously effective, according to economists, but the uncertainty and temporary nature of those protections leave the market at risk of a possible wave of foreclosures.
"At the peak in early June, 8.6% of all mortgage loans were in forbearance. Since then, forbearance levels have fallen as the economy has improved, but 5.5% of mortgage loans are still in forbearance, so risk to the housing market remains," explained First American Mortgage economist Odeta Kushi in an article about the significance of home equity when it comes to avoiding foreclosure.
According to Kushi, “The distress that many homeowners face in this recession is real but, because of the equity buffer, we are likely to avoid the foreclosure tsunami many are predicting.”
Here is how she explains it: "The foreclosure process is based on two steps. First, the homeowner suffers an adverse economic shock, such as a loss of income, leading to the homeowner becoming delinquent on their mortgage. However, delinquency by itself, even serious delinquency, is not enough to send a mortgage into foreclosure. With enough equity, a homeowner has the option of selling their home, or tapping into their equity through a refinance, to help weather the economic shock. It is a lack of sufficient equity, the second component of the dual trigger, that causes serious delinquency to become a foreclosure."
She points out that equity levels in many markets across the country are 40% or higher than they were during the Great Recession, which provides a "protective buffer" against foreclosure.
She added, "in addition to existing homeowner equity, house price appreciation driven by an undersupply of housing inventory relative to demand continues to push equity levels up across the country." That means that if distressed homeowners are forced to resolve delinquency at some point, an equity buffer would more likely result in a reluctant sale as opposed to a foreclosure.
The full report, including a list of metro areas with the greatest average home equity among homeowners is available on First American's blog at blog.firstam.com.