Fewer Forbearance Loans Mean More Inventory on the Horizon — But Is That Enough?

The percentage of US mortgage loans in forbearance has declined steadily in 2021.

Under a mortgage indulgence program, the servicer temporarily waives its right to foreclose on the mortgage and pursue foreclosure while the homeowner takes steps to bring the mortgage up to date. In 2020-2021, the number of homeowners in these programs increased – it was a time of record-low foreclosures and low inventories, despite high job losses due to the recession and pandemic.

Forbearance is still an option for some distressed homeowners, but streamlined registration under the Coronavirus Aid, Relief and Economic Security (CARES) Act is no longer an option as of September 2021. Homeowners can still apply to enroll in a forbearance program, but it is now available at the discretion of each service provider.

In November 2021, the proportion of mortgages in a forbearance plan fell to 1.67%, according to the Mortgage Bankers Association (MBA). For reference, just prior to the onset of the March 2020 pandemic and recession, only 0.25% of loans were protected by a forbearance plan. The share of mortgages in forbearance peaked in May 2020 at 8.5%.

Nationwide, around 835,000 homeowners are on a deferral plan.

From June 2020 to November 2021, the proportion of homeowners who left forbearance consisted of:

• 30% who exited with a loan payment deferral;
• 20% who have completed current payments;
• 17% who dropped out not ongoing payments;
• 14% who exited with a loan modification;
• 12% who dropped out with reinstatement;
• 7% who exited with loans paid off through sale or refinancing;
• 0.8% who exited with a repayment plan; and
• 0.6% who exited with other results, such as B. a short sale or a deed in lieu of foreclosure.

Related article:

Foreclosures, explained

Forbearance has helped keep inventory low—until now

Inventory remains at an all-time low in 2022.

As of January 2022, inventory shortages in California range from 30% below a year ago in Los Angeles to 28% below a year ago in San Diego. Inventory shortages aren’t quite as significant in inner-city cities, but still remain high at 14% yoy in Bakersfield, according to Zillow. but indulgence leaves rise, the inventory will rise.

If a Homeowner is unable to resume payments: a forced sale is preferred to foreclosure. Rather than going through the onerous, credit-damaging process of foreclosure, a foreclosure offers homeowners an opportunity to monetize their home equity, especially after the rapid price increases of 2021. Foreclosures are immediate increases in inventory because – lacking the ability to make mortgage payments – these sellers will not buy a replacement home.

Inventory will get a boost from forbearance exits, but will this be enough to meet demand?

Not even close – California has been experiencing a severe imbalance between supply and demand for years, which has only worsened in 2020-2021. The only way out of the inventory hole we’ve dug here in California is through more housing, the key to a stable housing market.

Housing starts declined steadily in 2019-2020 but started to gain ground in 2021. Housing starts give another two to three years to catch up, with obstacles around every corner, including:

• the more than 700,000 jobs still missing in California in November 2021 after the 2020 recession;
• tightened loans for builders;
• shortage of building materials, which will continue in 2022;
• rising mortgage rates, reducing borrowing capacity for homebuyers and builders alike; and
• California’s overly restrictive zoning regulations are stifling new housing where demand is highest.

A steady increase in housing starts is key to rebuilding inventory and restoring a sense of stability to the California housing market. Look to post-recovery 2024-2025 for the next strong performance in housing starts.