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62 program. What will happen to them as they exit, and how will the industry handle the high volume of borrower requests for repayment plans? FORBEARANCE AND FORECLOSURES IN 2020 As of the end of 2020, about five and a half percent of active mortgages—about 2.7 million loans—were in the forbearance program, down from over 8% at its peak in March. at represents a large number of borrowers for servicers to deal with as they exit the program, but it doesn't necessarily mean that an equally large number of foreclosures will follow. e data, in fact, suggest just the opposite: as people have exited forbearance, they've done so successfully. According to Mortgage Bankers Association research, from July 2020 when borrowers began exiting the program through the end of the year, about 87% of them did so with a repayment plan in place, their loans reinstated, their missing payments deferred to the end of the loan, paid off the loan, or had a loan modification in place—all positive outcomes. e remaining 13% of homeowners who left the program without a repayment plan of some sort in place are the ones who are probably most at risk of going into default. If these numbers remain consistent, about 325,000 people will exit the forbearance program over the next six to nine months without a plan in place. Some—but probably not all—of those loans will likely default. Prior to the pandemic, foreclosure activity was running at about half of its normal rate. In a normal year, about 1% of loans are in some stage of foreclosure. In early 2020, it was between 0.5% and 0.6%, so loan quality was very high and loan performance was twice as good as normal. ere were about a quarter- million loans in foreclosure when the pandemic hit. Presumably, most of them have been protected by the moratoria but all of those will eventually be coming back into the pipeline pretty rapidly once the moratoria are lifted. To put these numbers into perspective, if we take the 250,000 loans that were in foreclosure prior to the pandemic and assume all 325,000 of the borrowers exiting forbearance without a plan in place will default, there would be 575,000 loans in foreclosure—a foreclosure rate of 1.15%, barely above the historic average, and a far cry from the 4% of loans in foreclosure at the peak of the Great Recession. WHAT'S DIFFERENT IN 2021? at said, suggesting that there won't be a significant increase in default activity in 2021 would be silly. It's almost impossible to see a scenario where 40 million Americans lose their jobs and foreclosure rates don't increase. As we move through 2021, there are a number of things that could inflate the number of defaults. Unemployment: Before the pandemic, unemployment rates were at 3.5%, the lowest they'd been in 50 years. At the end of 2020, unemployment rates had come down from nearly 15% during the first wave of the pandemic to about 6.8%, roughly twice the pre-pandemic rate. Assuming that unemployment stays around that level, it wouldn't be unreasonable to suggest that foreclosure activity might also double, under normal circumstances. at would take the foreclosure rate from 0.5% back up to its normal level of about 1% of all mortgages. But the majority of jobs lost during the COVID-19 recession were concentrated in a handful of industries—travel, tourism, hospitality, retail, restaurants—and those industries tend to have young, hourly wage employees with relatively low homeownership rates. So the impact of job losses to-date has been much more severe among renters than homeowners, which could keep foreclosures from spiking. Given the nature of the job losses, there could be markets more susceptible to defaults than others—markets heavily dependent on some of the hardest hit industries. Markets like Las Vegas or Orlando, which are both almost entirely built on travel, tourism and entertainment, are probably going to be the hardest hit. Commercial Defaults: e nature of this recession, with certain industry segments being decimated, also means that we'll probably see more distressed inventory in The nature of this recession, with certain industry segments being decimated, also means that we'll probably see more distressed inventory in the commercial sector than we see in a more typical recessionary cycle. Feature By: Rick Sharga

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