Foreclosure Wave Ahead?

SMITH BRAIN TRUST – Among the newest worries to the economy in this coronavirus pandemic is this one: A rise in mortgage delinquencies.

According to a report this week from Black Knight Mortgage, home-loan delinquencies surged to 3.6 million in April, from about 2 million the month before. Black Knight, a mortgage technology and data provider, said it was the largest single-month increase on record.

The national delinquency rate, meanwhile, nearly doubled, to 6.45% from the month before, according to the data. It was the largest single-month increase ever recorded, some three times the prior record increase for a single month, set in the height of the mortgage crisis in late 2008.

Clifford Rossi, an Executive-in-Residence and Professor of the Practice at the University of Maryland’s Robert H. Smith School of Business, shared some insights about the current crisis.

Q: Do we need to worry about a wave of foreclosures in coming months? Or are the steps taken by lenders and the federal government enough to prevent it?

Rossi: Mortgage lenders/servicers, along with Fannie Mae, Freddie Mac and the FHA have quickly implemented programs to lessen the impact of the coronavirus on borrowers in the form of forbearance programs to buy borrowers time while the economy has effectively been shut down. Unlike the financial crisis, these organizations are now better prepared to deal with loss mitigation programs than they were in 2008.

Q: Are the plans being put forward enough to really help those struggling to pay their mortgage?

Rossi: Freddie Mac, Fannie Mae and FHA insure credit associated with the vast majority of mortgages in this country, and together with the GSEs' regulator, the FHFA, have put an effective forbearance package together.

My expectation is that they will leverage other tools if needed such as loan modifications that would provide further relief by reducing their payments for qualified borrowers. In the end, I believe the government will ensure the GSEs and FHA provide ample support to ailing borrowers.

Of more concern, however, is the rise in mortgage servicing by lightly regulated and illiquid nonbank servicers. The FHFA will need to address this issue soon in order to maintain the ongoing operation of mortgage servicing activity, vital to the functioning of the mortgage market.