Even though data shows inflation is cooling, a lot of people are still feeling the pinch on their wallets. And those high costs on everything from gas to groceries are fueling unnecessary concerns that more people are going to have trouble making their mortgage payments. But, does that mean there’s a big wave of foreclosures coming?
Here’s a look at why the data and the experts say that’s not going to happen.
There Aren’t Many Homeowners Who Are Seriously Behind on Their Mortgages
One of the main reasons there were so many foreclosures during the last housing crash was because relaxed lending standards made it easy for people to take out mortgages, even when they couldn’t show they’d be able to pay them back. At that time, lenders weren’t being as strict when looking at applicant credit scores, income levels, employment status, and debt-to-income ratio.
But since then, lending standards have gotten a whole lot tighter. Lenders became much more diligent when assessing applicants for home loans. And that means we’re seeing more qualified buyers who have less of a risk of defaulting on their loans.
That’s why data from Freddie Mac and Fannie Mae shows the number of homeowners who are seriously behind on their mortgage payments (known in the industry as delinquencies) has been declining for quite some time. Take a look at the graph below:
What this means is that, not only are borrowers more qualified, but they’re also finding ways to navigate through their challenges, exploring their repayment options, or maybe even using the record amount of equity they have to sell and avoid foreclosure entirely.
The Answer Is: There’s No Sign of a Wave Coming
Before there can be a significant rise in foreclosures, the number of people who can’t make their mortgage payments would need to rise significantly. But, since so many buyers are making their payments today and homeowners have so much equity built up, a wave of foreclosures isn’t likely.
Take it from Bill McBride of Calculated Risk – an expert on the housing market who, after closely following the data and market leading up to the crash, was able to see the foreclosure crisis coming in 2008. McBride says:
“We will NOT see a surge in foreclosures that would significantly impact house prices (as happened following the housing bubble) for two key reasons: 1) mortgage lending has been solid, and 2) most homeowners have substantial equity in their homes.”
Bottom Line
The concern about an impending wave of foreclosures is understandable given the economic challenges many have faced recently. However, several factors suggest that such a scenario is unlikely in the near future.
Firstly, the housing market remains robust. Home values have been appreciating, providing homeowners with significant equity. This equity acts as a buffer, allowing those facing financial difficulties to sell their homes and avoid foreclosure. Additionally, lenders are more cautious now than they were during the previous housing crisis. Stricter lending standards mean that borrowers are generally more qualified and less likely to default on their loans.
Secondly, the job market has shown resilience. While there have been fluctuations, overall employment rates have improved, and many industries have adapted to new economic conditions, providing stability for homeowners. Government interventions, such as mortgage forbearance programs, have also played a critical role in preventing foreclosures. These programs have given homeowners temporary relief, allowing them to get back on their feet without losing their homes.
Moreover, the lessons learned from the 2008 financial crisis have led to better-prepared financial institutions and regulatory frameworks. These measures help ensure that the market remains stable, even in the face of economic uncertainty.
If you’re worried about a potential foreclosure crisis, know there’s nothing in the data to suggest that’ll happen. Buyers are more qualified now, and that’s one reason why they’re not falling seriously behind on their mortgage payments.
