In March 2020, the U.S. experienced the coronavirus lockdowns that caused an economic shock to rock the nation.
Businesses across the country were forced to shut down, resulting in millions of job losses. Since then, approximately 30-40 million Americans lost their jobs in numbers not seen since the Great Depression of 1933.
Right at the same time unemployment climbed to its highest level in more than 80 years, the news about homeowners struggling to make their mortgage payments began to hit the media.
MOST AMERICANS DIDN’T KNOW IT AT THE TIME BUT A MASSIVE HOUSING CRASH HAD JUST BEGUN.
The economic stress induced by COVID-19 directly impacted many consumers’ ability to repay their loans.
At the onset of the crisis, with no income and money to pay for housing, it didn’t take long for the onslaught of mortgage and personal loan delinquencies to skyrocket after they had declined for 27 consecutive months.
In the first month of the pandemic, 1.6 million jobless Americans could no longer make their monthly house payments.
Corelogic then reported in April a sudden jump for early-stage delinquency rates (30-59 days past due) which quickly reached its highest level in 21 years at 4.2%.
Black Knight said the change delinquency rates were 90.22% higher at 6.45%;
Nearly double from 3.06% in March 2020.
These numbers represent the largest single-month increase ever recorded, and nearly three times the prior record for a single month during the height of the financial crisis in late 2008.
That included the nearly 211,000 borrowers who were in active foreclosure. With the foreclosure moratoriums in place, foreclosure starts and foreclosure sales hit record lows. Starts dropped more than 80 percent from this time last year, while foreclosure sales declined 93% for the same period.
To put these number in context, Andy Walden, economist and director of market research at Black Knight had said;
“It took more than 18 months before the first 1.6 million homeowners became delinquent during the Great Recession. There is still potential for a second wave of delinquencies in May.”
The Chief Economic for data property firm CoreLogic, Frank Nothaft said, “Even during the housing bust, and the crash, and the great recession, yes we did see increases in delinquency rates, absolutely.
But on a month-to-month basis, nothing at all like we saw between March and June.”
Just like the last housing crash of 2006-2012, many large metro areas with high unemployment immediately started reporting a significant rise in mortgage delinquencies. These are the first signs of a borrower’s inability to pay their homes loans and the impending foreclosures that will result.
At the time, of the top 100 largest metropolitan areas that led the nation in overall delinquency gains year-over-year were as follows:
- Miami – Up 6.7%
- Kahului, Hawaii – Up 6.2%
- New York City – Up 5.5%
- Atlantic City, New Jersey – Up 5.4%
- Las Vegas – Up 5.3%
THE GREAT AMERICAN HOMEOWNER BAILOUT
The only politically viable option for temporarily propping up real estate and avoiding a massive bubble was through a $3 trillion emergency lifeline to consumers signed by President Trump on March 27. It was called the Coronavirus Aid, Relief, and Economic Security (CARES) Act, amalgamating several vital pieces of legislation to note.
Mainly, a bailout for American homeowners via $75 billion in mortgage assistance and the ability for all borrowers in the U.S. to claim forbearance for up to one year with federally insured or funded mortgages such as FHA, VA, USDA, Fannie Mae, Freddie Mac.
The bill also provided rental relief to the tune of $100 billion low-income renters, as well as a special Federal Reserve lending program for mortgage servicing companies to set up a new emergency lending facility to owners of residential rental properties.
For homeowners with loans covered by the CARES Act, they had only needed to give a verbal statement of a pandemic-related financial hardship to be accepted into the forbearance program, directly or indirectly related to the pandemic, according to the Consumer Financial Protection Bureau (CFPB).
Mortgage servicers with federally insured loans extended forbearance agreements to borrowers without proof of income or any paperwork. These plans are up to 360 days so millions of Americans are living in their homes payment free and all the homeowner has to do is “tell their lender how long they need to live payment free.”
LIVE MORTGAGE FREE FOR A YEAR! NO PAPERWORK. NO VERIFICATIONS. NO FINANCIALS.
All they need to provide a signed statement assuring your lender that you are making efforts to come up with payments.
“As the true impact of the economic shutdown during the second quarter of 2020 becomes clearer, we can expect to see a rise in delinquencies in the next 12-18 months – especially as forbearance periods under the CARES Act come to a close,” said Frank Martell, president and CEO of CoreLogic.
Since the crisis began in March, over 6 million property owners had entered into the national mortgage forbearance program agreements.
THE BIG QUESTION STILL REMAINS – WHO CAN PAY THESE LOANS BACK?
That is what the Manager of the Foreclosure Prevention Program at the North Carolina Housing Finance Agency, Mary Holder is concerned about;
“We’re concerned now because the forbearance is temporary. And a lot of the forbearances and the hold on foreclosures and evictions run through the end of the December, so in 2021 we anticipate that a lot of homeowners will be facing foreclosure and will need assistance, will need help with payments.”
Only time will tell and if history is any clue looking to past housing bubbles, we are in for a wild foreclosure ride ahead!
THE FEDERAL RESERVE AND BIG BANKS TIGHTEN LENDING BEHIND THE SCENES
The big banks are always the first people to see a future housing crash. They know history and they know how to finagle their books for accounting purposes in order to ride out a future real estate storm.
That is why at the beginning of every financial, they really start to tighten lending standards and issue a lot less credit and loans to consumers.
Just like this time!
According to the New York Federal Reserve;
Mortgage balances shown on consumer credit reports on June 30 stood at $9.78 trillion, a $63 billion increase from 2020Q1. Balances on home equity lines of credit (HELOC) saw an $11 billion decline, its 14th consecutive decrease since 2016Q4, bringing the outstanding balance to $375 billion. Credit card balances declined sharply in the second quarter, by $76 billion, the steepest decline in card balances seen in the history of the data and reflecting the sharp declines in consumer spending due to the COVID-19 pandemic and related social distancing orders.
SHADOW MORTGAGES AND SHADOW FORECLOSURES
There is a lot of subterfuge when it comes to trying to read the numbers but the big trend to keep an eye on are the shadow mortgages of delinquent homeowners who have entered into forbearance plans and are now considered current. The other number to watch is the extremely large amount of homeowners who are 90 plus days late on their payments.
According to the New York Federal Reserve’s Quarterly Report for the 2nd Quarter released in August 2020, 61.1% of these delinquent homeowners became current by entering into a forbearance plan. Meaning, that they were late on their mortgage but for banking accounting’s sake and to not cause a massive housing crash, these people were given a free lifeline to save their homes from potential foreclosure.
The NY Fed said;
“The uptake in forbearances is notably visible in the delinquency rate transitions for mortgages.
The share of mortgages in early delinquency that transitioned ‘to current’ spiked to 61.1% reflecting that many of those became forborne, while there was a decline in the share of mortgages in early delinquency whose status worsened during the second quarter of 2020.
There were only 24,000 new foreclosure starts; given that homeowners with federally backed mortgages are currently protected from foreclosure
through a moratorium in the CARES Act.”
FOR EXAMPLE, AT THE TIME OF THIS WRITING, 3,542,000 ARE DELINQUENT OF WHICH 2,504,000 ARE SERIOUSLY DELINQUENT (90+ DAYS) ON THEIR MORTGAGES.
The seriously delinquent number represents only 100,000 less than when the COVID-19 pandemic started at 2,366,000 and not far behind the Great Recession levels of the last housing crash which saw 2,973,000 at its peak.
THESE ARE THE NUMBERS THAT TELL THE TRUE STORY OF WHAT IS LYING AHEAD FOR THE U.S. REAL ESTATE MARKET.
THESE DELINQUENCY RATES ARE THE FIRST SIGNS THAT HOUSING WAS ABOUT TO COLLAPSE.
One thing we can safely say as we look back was that this was the U.S. government’s emergency bailout of the economic system that was surely heading for a massive crash as we have never seen in the history of this country.
At the time of this writing, the number of home mortgages in October that entered into forbearance plans due to the COVID-19 pandemic climbed 15% higher than in September, according to the latest report by Black Knight Financial Services. Approximately 4 percent of all GSE-backed mortgages and 9.7 percent of all FHA/VA loans are now in forbearance plans.
Black Knight said an increase in borrowers entering into these agreements with many resuming previously expired plans, so this month saw significantly fewer people exiting from the program.
The data firm said that there was a total of 33,000 new plans initiated through October 27. New forbearance plans dropped by 7.0 percent month-over-month while reactivations are on the rise at 50 percent.
The increase brought the number of plans to over 3 million again, and the share of all active loans in mortgage forbearance risen from 5.6 percent the prior week to 5.7 percent. These loans represent $619 billion in unpaid principal. Since March, over 80 percent of these loans have had their terms extended.
As these agreements end, millions of borrowers will be required to make their monthly mortgage payment again.
IN ALL, THE $11 TRILLION RESIDENTIAL MORTGAGE MARKET HAS BECOME INCREASINGLY DISTRESSED SINCE THE START OF THE CRISIS.
According to Xiaoqing Zhou, the senior economist in the Research Department of the Federal Reserve Bank of Dallas;
“These provisions, if implemented quickly and effectively, may curtail the rise in the mortgage delinquency rate, provided the economy returns to full employment after a short period. If the economic shutdown is extended or if consumer demand remains weak after the economy reopens, these provisions will only delay rather than offset the expected rise in the delinquency rate.”
That is why at precisely the same time that the U.S. government moratoriums on evictions and foreclosures had ended in July, an alarmingly high rate of mortgage delinquencies were reported as more borrowers found themselves unable to make their payments after their life line was cut.
For example, the October 2020 report from CoreLogic had shown the highest number of mortgage delinquencies than at any time since 1999 when the data firm first began tracking mortgages.
Meanwhile, commercial mortgage-backed securities (CMBS) delinquencies is expected to rise to Great Recession levels. Already from March to April, payments on CMBS loans from retail properties and hotels to reach over thirty days late have ballooned by around 10 and 20 percent, respectively. CMBS that are backed by multifamily residences, is also expected to suffer as struggling families forego rent.
THE BAD NEWS DOES NOT END THERE…
More signs of an impending crash were painfully evident by the end of October. According to the latest U.S. Census Household Pulse Survey, almost
10 MILLION AMERICANS ARE AT RISK OF FORECLOSURE.
IE: They were behind on their mortgage or rent payments and had little to no confidence to make their next month’s payment.
Many of the top large Metro areas that experienced massive foreclosure rates have already shown signs that a new crisis much bigger than in 2008 is brewing behind the shadow numbers.
This may be why the CDC recently issued an emergency order banning evictions between September 4th and the end of the year. It is under Section 361 of the Public Health Service Act to temporarily halt residential evictions under the guise to prevent the further spread of COVID-19.
MASSIVE UNEMPLOYMENT WITH NO SOLUTIONS ON THE HORIZON
We also have the October 2020 jobs report from the Bureau of Labor Statistics, which reported approximately 3.6 million Americans have been out of work for more than 27 weeks.
This number equates to 1 in 3 people currently unemployed since the COVID-19 pandemic wreaked havoc on the U.S. economy in the spring.
Now that government mortgage assistance to more than half of all unemployed Americans receiving jobless benefits is set to expire December 31, 2020, the share is likely to grow as time moves forward.
The lockdowns have devastated businesses across the U.S. creating massive unemployment. In July, the moratoriums and unemployment protections ended, leaving almost 10 million homeowners and renters are at risk of foreclosure or eviction.
It is no wonder that the real impact on the housing market due to the worst unemployment crisis in a lifetime, with over 32 million people claiming state or federal job benefits, has not even been realized.
SIGNS OF ANOTHER HOUSING BUBBLE
Nobel Prize winner and economist Robert Shiller, accurately predicted two previous economic crises and the collapse in the US housing market that led to the global financial crisis in 2008.
Now he is predicting another housing crisis.
In July 2019, Shiller told CNBC;
“I think there’s a risk that home prices in urban areas may decline.”
Then in September, he said on Bloomberg Television said:
“It would suggest declining home prices in the near future,” Shiller, who teaches at Yale University, told Bloomberg Television on Thursday. “I wouldn’t be at all surprised if house prices started falling.”https://platform.twitter.com/embed/index.html?dnt=false&embedId=twitter-widget-0&frame=false&hideCard=false&hideThread=false&id=1169540174231089153&lang=en&origin=https%3A%2F%2Fpropertyinvestortrends.com%2Fcrash%2F&theme=light&widgetsVersion=ed20a2b%3A1601588405575&width=550px
More recently in September of this year, the Yale economist had issued more doom about the road ahead when he said “we’re sneaking back into the old 2006 mentality” during an interview with Yahoo Finance’s YFi PM;
“Housing is driven by narratives. Before 2007, the narrative was flipping houses [and the belief that] home prices have always gone up.
Then, after the Great Recession, it was tragic narratives about people who lost their home or dangers of borrowing too much or lending too much,” he said.
“IT’S BEEN 10 YEARS SINCE THE CRISIS. NOW, THOSE NARRATIVES ARE STARTING TO BE FORGOTTEN.”
In June 2019, Redfin chief economist Daryl Fairweather issued an early warning about the market “Home prices are high right now, but they’re high because there’s not enough supply to meet demand, which means there’s not a bubble at risk of bursting.
“Most of today’s financed homeowners have excellent credit and a cushion of home equity, making them unlikely to default on their mortgage even if their weekly grocery bill grows or their stock portfolio shrinks in the next recession, he said.”
Just as millions of people lose their jobs and millions are facing foreclosure, what is left of the employed homebuyers across the nation are snatching up homes are a record high causing house prices to reach bubble territory.
Over leveraged real estate investors and homebuyers who are purchasing at the top of the market may lose everything
There is no way that housing continues to sail unscathed through that kind of economic crisis.
In the end, it is estimated that approximately 40 million Americans may lose their homes, four times the amount seen during the Great Recession.
Emily Benfer, an eviction expert and a visiting professor of law at Wake Forest University had recently warned the media;
“The United States is facing the most severe housing crisis in history. Countless lives will be negatively altered solely because of the pandemic and economic recession.” She pointed out that the government is not offering meaningful assistance when she said, “Congress has offered the equivalent of a hand towel in a hurricane.”
With no solutions on the economic horizon and more lockdowns predicted, the real estate market will only worsen.
I’m predicting that over the next 1-3 years, the U.S. will continue to experience massive unemployment which will lead to the biggest housing crash this nation has ever seen.
One that will permanently reshape the American real estate landscape forever.
New York Federal Reserve’s Quarterly Report for the 2nd Quarter
Maurice is the Chief Inspector for U.S. Commercial Building Inspections of Southern California. He is a Certified Commercial Property Inspector (CCPI) and brings over 25 years of extensive experience in real estate, construction, restoration, remediation, and business development.
Do you need an inspection? Call 619-473-2133 for a free quote.