Will Forbearances Lead to Foreclosures? By Mercedes Shaffer

Will Forbearances Lead to Foreclosures?

BY MERCEDES SHAFFER

The market has been so hot for so long that it makes sense that what goes up must come down. Given historic economic cycles, the housing market is overdue for a correction, so when are prices going to drop? Well, they may not…

When the pandemic hit in 2020 and the world was in lockdown, banks offered forbearances to borrowers so that they could avoid defaulting on their loans. Nearly 8.3 million Americans took advantage of the opportunity to defer payments, weather they needed to or not, and entered into forbearance.

This meant that homeowners got to postpone paying their mortgage bill for a period of time, which in turn freed up capital for spending. At the same time, the government was printing money and handing out stimulus checks, so people had even more money to spend. The rampant spending contributed to the massive inflation we’ve been experiencing and it seemed as though American’s were growing accustomed to a new lifestyle that wouldn’t be sustainable once loan forbearances were over.

Now that the market has digested all of the changes from the pandemic, the data is showing that currently there are only 513,000 people in forbearance across America and the number is continuing to drop. This means that 94% of homeowners have exited forbearance.

Of the 7.7 Million Americans who exited forbearance, a total of 2.7 Million Americans completely removed or paid off their forbearance and 4.3 Million are performing — meaning that they either did a workout loan and are paying it off in an installment plan, or they deferred it to the end of their loan.

Nationally, a total of 10% of those in forbearance are delinquent and of those who are delinquent, 1% are in foreclosure. In Orange County, distressed homes, both short sales and foreclosures combined, made up only 0.2% of all listings. There were only 4 foreclosures and 3 short sales available to purchase in November in all of Orange County and there’s no indication that the number will be rising.

Foreclosures were important drivers of previous housing price corrections, like in the 1990’s and 2008. The reality is that most loans have been made whole and there is no foreseeable tidal wave of foreclosures about to hit the market. While many buyers are waiting for a market crash, there has only been a slight softening of the market due to high interest rates. In many markets, especially coastal, the softening has meant more days on market, not a drop in property prices.

Furthermore, 40% of Americans own their homes free and clear. Of the remaining 60% who have a loan, most have an interest rate of 4% or lower, so they are going to hold onto that low mortgage rate for as long as possible and not sell if they don’t need to, until interest rates come down again.

While there are a lot of headlines about impending housing market crash, you can’t lump Orange County into the generic category of the entire housing market. The Orange County market is strong and people have a lot of equity in their homes. It’s also a market that is attracting a lot of out-of-state and international buyers. Almost 50% of luxury homes are purchased by out of state residents and Orange County is attracting buyers who want to enjoy the incredible weather, safety and great lifestyle that OC has to offer.

To accommodate the growing appe-