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Why Pending Foreclosure Wave Won’t Be Like the Last One

There is little doubt that the COVID-19 pandemic will give rise to more foreclosures, but industry professionals predict conditions won’t be nearly as bad as they were in 2008-2010, for a few reasons.  

A prominent housing analyst told Bankrate.com to expect hundreds of thousands of defaults next year as mortgage forbearance periods end. Bankrate points out that the federal government predicts several billion dollars in loan losses at Fannie Mae and Freddie Mac. But as bad as the projections might seem, Bankrate added, conditions are mild compared to those in the Great Recession. 

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

During the Great Recession, in the first half of 2010, 1.65 million American homes went into foreclosure, according to ATTOM Data Solutions. In the first half of 2020, barely 165,000 loans were hit with foreclosure actions. 

McLaughlin points out that 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,” Bankrate’s Jeff Ostrowski reported. “But as the housing market muscles through this economic downturn, it looks as if foreclosures will form a trickle rather than a flood.” 

ATTOM reported at least 200,000 American homeowners are likely to default next year.  

Worst case scenario, ATTOM reported, the foreclosure count could range as high as 500,000 homes. Todd Teta, ATTOM's Chief Product and Technology Officer, forecasted a 70% increase in foreclosures over the next two years. 

The fallout is likely to vary by location, the company predicted. ATTOM expects foreclosures to soar in Colorado, Massachusetts and California.  

The anticipated most- and least-affected cities are listed here 

There are a couple of main reasons, reported by Bankrate, that Americans won't see the same crisis they saw after 2008:

1. American homeowners have built up large reserves of home equity. The situation was the opposite in the Great Recession.

“Unlike the Great Recession, home prices in most markets are rising,” said Joel Kan, Associate Vice president of Industry and Economic forecasting at the Mortgage Bankers Association. “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.”

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.

2. The federal government has reacted relatively quickly and aggressively to the COVID recession, he said.

Also, in general, lenders are positioning for a more-cooperative, less-punitive approach, Bernadette Kogler, co-founder of RiskSpan, a data analytics firm, told Bankrate.

“The industry is going to do a better job of keeping people in homes,” Kogler said. “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.”

About Author: Christina Hughes Babb

Christina Hughes Babb is a reporter for DS News and MReport. A graduate of Southern Methodist University, she has been a reporter, editor, and publisher in the Dallas area for more than 15 years. During her 10 years at Advocate Media and Dallas Magazine, she published thousands of articles covering local politics, real estate, development, crime, the arts, entertainment, and human interest, among other topics. She has won two national Mayborn School of Journalism Ten Spurs awards for nonfiction, and has penned pieces for Texas Monthly, Salon.com, Dallas Observer, Edible, and the Dallas Morning News, among others. Contact Christina at [email protected].

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