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Forbearance, a temporary relief from the responsibility of paying a mortgage, is one tool people can use when they face financial hardship. During economic distress, such as the COVID-19 pandemic or the Great Financial Crisis, forbearance rates spiked as more homeowners found it impossible to make their monthly payments.
The Mortgage Bankers Association has released its Loan Monitoring Survey for June 2024, which shows that forbearance rose to 0.23%, meaning that 115,000 homeowners are in forbearance plans. This was the first increase since October 2022. Marina Walsh, CMB, MBA’s Vice President of Industry Analysis, also noted that “the performance of both loan workouts and overall servicing portfolios weakened, particularly for government loans.”
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What could have caused forbearance rates to tick up? Walsh cited two main factors. The first is the impact of severe weather events, including floods, fires, and major storms during June. The second is early signs of consumer distress that may be causing people to be unable to pay their mortgages. It is this second factor that is potentially more worrisome. The report shows that 16.2% of people went into forbearance related to a natural disaster, while 75.9% are in forbearance due to a hardship such as job loss, death, divorce, or disability.
A 0.23% forbearance rate isn’t exceptionally high. By comparison, the rate shot up to 5.6% during the COVID-19 pandemic, and the creation of multiple government forbearance programs at the national, state, and local levels helped alleviate a more serious problem. The government is ready to step in again as needed. The Consumer Financial Protection Bureau recently released a proposal to help loan servicers work with borrowers to avoid foreclosure. Statistically, most forbearance doesn’t lead to foreclosure. The Mortgage Bankers Association report showed that 59.4% of those in forbearance are in the initial plan stage, while 21.4% are in a forbearance extension. Most people can exit forbearance and resume payments.
This situation is different from previous periods because most homeowners have significant home equity and still have a mortgage interest rate under 5%. First quarter data from CoreLogic showed that homeowners with mortgages saw their home equity increase by 9.6% year over year, and average equity was close to $305,000. Dr. Selma Hepp, chief economist for CoreLogic, pointed out that “higher prices have also lifted some 190,000 homeowners out of negative equity, leaving only about 1.8% of those with mortgages underwater.”
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Owners with significant equity in their homes have options. They may be able to get a home-equity loan or home equity line of credit, refinance, or if all else fails, they can sell their home and put some of that equity into their pockets for a fresh start. With existing home prices hitting a record high of $426,900, it seems like equity may continue to rise for some time.
The problem exists in areas where equity has not appreciated as much. The Mortgage Bankers Association Loan Monitoring Survey showed that the five states with the lowest current loan shares were Louisiana, Mississippi, Indiana, Alabama, and West Virginia. These are all states where the average home price in many markets is below the national average, which indicates that these owners may have less equity to tap into.
In most cases, forbearance is temporary, and the current rate shouldn’t be too much cause for concern. However, market watchers should be aware that there are some signs that people are struggling, such as higher delinquency rates for credit cards and auto loans. While that trouble has not spread into the mortgage market, it is a reminder that consumers are starting to feel increased pressure. If the employment market weakens or we experience another type of systemic shock, we can expect that forbearance rates may continue to rise.
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