This piece originally appeared in the March 2023 edition of DS News magazine, online now [1].
Temporary foreclosure prevention efforts implemented almost immediately after the COVID-19 pandemic was declared in March 2020 helped the U.S. housing market avoid an estimated 3.2 million foreclosure starts and 1.5 million completed foreclosures, according to a new Auction.com analysis.
“(These are) much better results than we ever would have guessed a priori given the magnitude of the pandemic,” said Laurie Goodman, Institute Fellow at the Urban Institute and Founder of the Institute’s Housing Finance Policy Center, citing statistics from Black Knight showing that 5% of the 8.2 million mortgages that entered forbearance during the pandemic are still delinquent or in active foreclosure. “Obviously this was helped by robust home price appreciation, but the results were truly extraordinary.”
The Auction.com analysis used public record data from ATTOM Data Solutions and delinquency data from the Mortgage Bankers Association to determine the historical roll rate of seriously delinquent mortgages (SDQ)—those where the borrower is at least 90 days behind on mortgage payments—to foreclosure start and foreclosure completion.
Roll Rate Reversal
Those historical roll rates, which were remarkably stable during the eight-year housing boom leading up to the pandemic, plummeted during the pandemic, likely due in large part to massive, pandemic- triggered foreclosure prevention programs.
The foreclosure prevention programs were headlined by a nationwide foreclosure moratorium on government-backed mortgages—including those insured by the FHA, Veterans Administration (VA), and U.S. Department of Agriculture (USDA) along with those owned by the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac—and a generous forbearance program that gave borrowers an up to 18-month pause on mortgage payments.
The Auction.com analysis calculated expected foreclosure starts and foreclosure completions based on the average roll rates from SDQ between 2012 and 2019 and actual SDQ numbers reported during the pandemic. Due to the sharp spike in SDQ rates following the pandemic declaration, this calculation results in an expected 3.6 million foreclosure starts and nearly 1.7 million foreclosure completions between Q2 2020 and Q3 2022.
But the actual number of foreclosure starts during that period was only 405,000—nearly 3.2 million fewer than expected. The actual number of completed foreclosures during the same period was 169,000—more than 1.5 million fewer than expected based on historical roll rates. In percentages, actual foreclosure starts were 788% lower than expected while actual foreclosure completions were 872% lower than expected.
Up until the pandemic, the historical roll rates from SDQ to foreclosure start and from SDQ to foreclosure completion serve as reliable predictors that err slightly on the side of under-predicting the actual numbers. For the eight-year period ending in 2019, the roll rate calculation predicts counts that are just 3% below the actual numbers for foreclosure starts, and less than 1% below the actual numbers for foreclosure completions.
Emergency Protections No Longer Needed
The pandemic-triggered foreclosure moratorium expired in June 2021, although it was effectively extended through the end of the year by a temporary mortgage servicing rule adopted by the Consumer Financial Protection Bureau (CFPB).
Foreclosure completions did not surge once the moratorium ended, an indication that policymakers were wise to phase out this emergency foreclosure prevention measure when they did.
Foreclosure completions have gradually increased in 2022, but through the first three quarters are still less than 50% of pre-pandemic levels, according to data from Auction.com (a platform that accounts for nearly half of all foreclosure auctions nationwide).
The forbearance program will be in effect at least until the COVID-19 National Emergency is officially over, but a relatively few borrowers continue to enter forbearance—less than 10,000 a month compared to a total of more than eight million that have ever entered over the lifetime of the program, according to data from Black Knight.
In an Urban Institute report titled “Normalizing Forbearance,” Laurie Goodman and co-authors Alexei Alexandrov and Ted Tozer argue that the blanket, no-documentation and long-term payment pause features of the COVID-19 forbearance program are not necessary or prudent outside of national emergencies.
“In the case of a national emergency, 12 to 18 months I think is totally appropriate. In the case of normal, day-to-day, I think it’s a long period of time,” said Goodman, referring to the maximum length of mortgage payment pause allowed under the COVID-19 forbearance.
Goodman and her co-authors propose limiting the payment pause to four months. They also propose limiting forbearance to a targeted set of four borrower circumstances—job loss, death of co-borrower, divorce, or a qualifying health event—and requiring documentation of those circumstances from borrowers.
The proposed non-emergency forbearance framework stems not only from lessons learned from the pandemic forbearance but also lessons learned during the Great Financial crisis and from natural disasters that have occurred in the last decade.
“I think you have to think of the COVID forbearance program as evolving from HAMP, the original Great Financial Crisis loss mitigation product,” Goodman said. “We moved to streamlined modifications. And then a series of natural disasters sort of forced the expansion of the program. That became the pandemic playbook, basically what was used for natural disasters.”
The natural disaster playbook typically involved a relatively short foreclosure moratorium in the immediate aftermath of the emergency followed by more focused forbearance and loss mitigation. This playbook helped markets impacted by natural disasters to avoid the unintended negative consequences of a lengthy blanket foreclosure moratorium that some states experienced following the Great Financial Crisis.
“Lengthy, blanket foreclosure moratoria often only serve to kick the foreclosure can down the road rather than addressing the root issues that can help prevent foreclosure,” said Ali Haralson, President of Auction.com.
“This blanket approach ends up hurting more than helping in the long run, particularly in a sluggish housing market where home prices are flatlining or falling. In the wake of the Great Recession, states employing this approach tended to be where so-called zombie foreclosures became most prevalent and where home prices took the longest to bounce back.”