Today, millions of American homeowners and landlords will face the bill for the lifeline they’ve been provided. The CARES Act loan forbearance and eviction moratoriums will end and the nearly 2 million homeowners who sought relief will exit forbearance as the safety net is removed. With nearly 1.5 million homeowners more than 90 days delinquent, a storm is approaching the country’s residential sector. Commercial lenders and landlords are watching, considering themselves lucky, as commercial delinquencies continue to decrease across all property types and lending hits pre-pandemic levels.
Homeowners were initially allowed to request up to 12 months of forbearance protection. The program was then extended a few times. About 3.5 percent of the nation’s 53 million federally-backed mortgage holders are in forbearance. In context, that number is hopeful, considering 7.25 million borrowers, about 13 percent, were in forbearance at the height of the pandemic. That’s creating what experts call a K-shaped recovery, where the majority of homeowners rebound upper while the rest continue further into the hole. At this point, homeowners still in forbearance likely haven’t been able to make payments for a very long time, piling on debt. The end of forbearance protections and continued economic recovery have Zillow predicting approximately 850,000 borrowers will exit forbearance by October 2021. Low-income borrowers, who are most likely to use federally backed mortgage programs, will be particularly hard hit. Atlanta, Houston, Chicago, and Dallas have the highest number of those types of borrowers, making their housing markets more vulnerable to supply shocks when a large number of those homes hit the market. About a third of homeowners aren’t eligible for forbearance because they don’t have mortgages backed by the Department of Housing and Urban Development, the Department of Veterans Affairs, the Agriculture Department, or the Federal Housing Finance Agency.
A significant portion will choose to sell to benefit from record home price appreciation, increasing housing inventory levels across the country, adding about .40 months housing supply. If homeowners are more distressed than previous owners existing forbearance, supply could increase as much as .80 months. Strong economic activity and a seller’s market have kept demand for homes high, keeping the housing market healthy. That’s prevented waves of involuntary foreclosures like we saw in the wake of the 2008 Financial Crisis. Keeping the residential housing market healthy is crucial to protecting homeowners who have been hit hard by the pandemic downturn because without a healthy housing market homeowners don’t have an escape hatch in the form of listing. Financial pain is serious for thousands of Americans, but keeping the housing and financial sector above water with federal and state dollars has saved most homeowners from financial collapse.
“Any homeowner who wanted to sell, not only could sell, they could sell quickly, and probably for more than they bought the home for just given the lack of inventory on the market,” Mike Fratantoni, senior vice president and chief economist at the Mortgage Banking Association, told the Washington Post.
On the commercial side, you’d hardly know there’s been a pandemic. Overall loan delinquency rates improved to 95.5 percent, according to MBA’s CREF Loan Performance Survey. U.S. CMBS delinquency rate declined to 3.59 percent in July, according to Fitch Ratings. Collections at all property types remain above 95 percent, according to the National Association of Real Estate Investment Trusts. With rent rolling in, forbearance isn’t likely for most commercial assets. Foreclosure is even further off. Any investors looking to invest in distress are still looking.
“Commercial and multifamily mortgage delinquencies declined in July, hitting the lowest point since the onset of the pandemic,” said Jamie Woodwell, MBA’s Vice President of Commercial Real Estate Research. “Loan performance continues to be very property-type dependent, with lodging loans still the hardest hit but showing strong improvement. Office properties saw a decline in overall delinquencies, but there was an uptick in loans that are newly delinquent. The strength of the economy should continue to support most property types in the coming months.”
A general lack of pain around commercial debt has lenders opening the checkbook. Commercial property lenders are expected to close $578 billion of loans backed by income-producing properties in 2021, a 31% increase from 2020’s volume of $442 billion, according to the MBA’s latest forecast. Commercial mortgage-backed securities (CMBS) issuance is booming, especially commercial property collateralized loan obligations (CLO) and single asset single borrower (SASB) loans, mostly consisting of transitional loans and large loans for entire portfolios or trophy assets, respectively. Commercial CLO issuance has already broken the full-year record, reaching more than $20 billion. SASB loan volume hit $31 billion, on track to exceed the pre-pandemic average, according to reporting from The Real Deal. Only conduit loans remain below averages.
It seems patience has paid off for both the residential and commercial sectors. Luckily, patience is baked into the property sector, relying on assets that take months to build to produce income for decades. Patience with and from distressed homeowners has helped to prop up the residential housing market. More than 14 percent of all mortgage borrowers have utilized some form of forbearance protection. The 8,100 foreclosures in the second quarter of 2021 were the lowest total since 1999. Distress in the commercial property sector has not materialized in any real sense. Collections are strong, risk is steady, and real estate dry powder is at record levels thanks to a nearly $6 trillion in aggressive fiscal and government policy. Investors waiting for the shoe to drop in real estate are still waiting.