5 ways mortgage forbearance bailed out homeowners — and built another housing boom

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When the global economy plunged into recession last year, homeowners braced for impact. The last time spending tanked, of course, a wrenching housing crash followed.

The post-COVID housing market played out much differently than expected. During the pandemic, home prices soared, mortgage rates plunged and foreclosures essentially disappeared.

The federal government’s generous mortgage forbearance program played a prominent role in the robust housing market. By allowing borrowers to skip payments with no penalties and few caveats, forbearance put a floor under property values.

While most borrowers who entered forbearance had exited as of March, some 2.2 million homeowners remained in mortgage forbearance. “It’s still a very substantial number,” says Andrew Haughwout, senior vice president at the Federal Reserve Bank of New York.

Haughwout and other analysts at the New York Fed delved into the details and generated these takeaways:

1. Delinquencies dwindled — and they will stay well below Great Recession levels.

Going into the pandemic, the overall mortgage delinquency rate was a rock-bottom 1.3 percent. During the pandemic, despite a sharp rise in unemployment, delinquency rates fell to just 0.9 percent. Meanwhile, about 2.9 percent of American homeowners are in forbearance and not making payments.

Joelle Scally, a senior data strategist at the New York Fed, uses some simple arithmetic to create a worst-case scenario: If all of those borrowers are unable to pay their mortgages after forbearance, the delinquency rate would climb to 3.8 percent.

However, that would remain well below the 2010 peak of 6.3 percent. During the Great Recession, a flood of foreclosures depressed home prices. This time around, however, homeowners have much more equity in their homes — and, therefore, are far less likely to give them up to foreclosure or short sales.

2. Many homeowners went into forbearance but never skipped a payment.

Some 30 percent to 40 percent of homeowners applied for forbearance yet kept paying their mortgages. The New York Fed’s Donghoon Lee says this shows that many borrowers considered forbearance an “insurance policy” — but one they never used.

Borrowers were fearful enough about the direction of the economy that they applied for forbearance in case they needed it. Ultimately, their financial situations stayed strong enough that they never followed through by skipping payments.

3. Homeowners in forbearance directed some of their skipped payments to paying down credit card debt.

Among borrowers who participated in forbearance, they went into the recession owing an average of $9,000 in credit card balances. Those balances declined by an average of 23 percent through March.

Homeowners who had mortgages but didn’t go into forbearance entered the recession with $6,000 on cards and paid down their balances by 15 percent.

The analysts’ conclusion: Many homeowners used the combination of less spending and stimulus payments to reduce their credit card debt. Those who went into forbearance redirected mortgage payments to an even more aggressive reduction of credit card balances.

4. Lower-income homeowners were more likely to enter forbearance.

The forbearance patterns reflect a broader trend in the two-pronged economy, one that has seen affluent Americans prosper and lower-income households struggle.

Homeowners in all of the following categories were more likely to enter forbearance: borrowers living in lower-income neighborhoods, those with lower credit scores, those with Federal Housing Administration loans and those already behind on their mortgages before the pandemic.

Borrowers with higher credit scores and higher incomes were less likely to enter forbearance, and more likely to exit quickly.

5. Forbearance helped create the extreme shortage of homes for sale.

The inventory of homes for sale plunged to record lows after the pandemic. It’s impossible to pinpoint just how many homeowners were able to remain in their homes because of forbearance, Haughwout says.

However, it’s clear that the generous aid package has affected the housing market by heading off distress sales — and therefore constraining supply. “We haven’t seen large waves of houses being put on the market,” Haughwout says.


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Written by
Jeff Ostrowski
Senior mortgage reporter
Jeff Ostrowski covers mortgages and the housing market. Before joining Bankrate in 2020, he wrote about real estate and the economy for the Palm Beach Post and the South Florida Business Journal.
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