Critical defaults are slowly receding as the choice to ban foreclosures is imminent

The number of mortgages that would normally be close to foreclosure fell again in May, but it remains relatively high and this could affect decisions by federal officials on when to move forward with collections and whether to add additional housing assistance shall be.

According to Black Knight's First Look report, there were nearly 1.67 million mortgages unpaid for 90 days or more in May, up from nearly 1.77 million the previous month. The May figure, which includes temporarily suspended payments of up to 18 months for pandemic hardship, rose from just 631,110 in the same month a year ago; but it is still a long way from its 2009 peak after the Great Recession when it approached 3 million. In addition, more than 2 million home loans were in foreclosure at the time. (As of May, there were fewer than 148,000 loans in foreclosure due to the bans, which generally only allow vacant properties to move forward in the process.)

The fact that there are fewer problem loans now than during the Great Financial Crisis, and both market conditions and the ability to process high volumes of bad mortgages are now widely viewed as cheaper, could encourage federal officials to minimize the number of borrowers who from their homes with further foreclosure moratorium extensions. (Though they obviously want to avoid a situation where mortgage servicers have a backlog of bad borrowers that leads to a counterproductive erosion of home equity.)

"I think one should keep in mind that most of these loans are … in active forbearance or loss mitigation so that they would be largely protected from foreclosure even if the state moratorium ended," said Andy Walden, economist and research director for Black Knight . "Certainly there is some risk of foreclosure for borrowers who do not participate in loss-taking with their service providers when the moratoriums end, but the CFPB could continue for the remainder of the year with additional safeguards."

The federal enforcement moratoria have been extended several times and most had June 30 at the time of going to press. The Consumer Financial Protection Bureau has also proposed additional housing eases, which could include a new or extended foreclosure ban. The CFPB was still working on finalizing its proposal on Wednesday afternoon.

“We continue to strive to work with both service providers and homeowners to prevent avoidable foreclosures as much as possible. The economic recovery risks leaving some communities behind and no one should lose their home without exploring their options, ”a CFPB spokesman said in an email.

Without intervention, Walden predicts a "massive workload" for service providers could arise later this year as borrowers in the first wave of those who have received their 18-month prepayments for pandemic-related hardships reach the end of their term. He estimates that nearly 900,000 borrowers could fall into this category.

On the flip side, without this event, the recovery could be dragged out at the gradual pace of improvement seen in major bad debts, noted Walden.

"If we continued like this, it would take about 36 months for the failure rate to normalize back to pre-pandemic levels," he said.

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