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63 the commercial sector than we see in a more typical recessionary cycle. e retail and hospitality segments in particular will suffer in the short term. Retail was already struggling before the pandemic, and the shelter-in-place orders and government-mandated business closings have already taken a toll on the industry. e plight of suburban malls has been well chronicled over the past few years, and the recession has accelerated their demise in many markets; but thousands of smaller retail facilities and restaurants have gone out of business in the last year, creating many more distressed properties in the process. In the hotel segment, a surprisingly large number of smaller, limited service hotels are owned by small-to-mid-sized investors, who may not have the financial strength to survive an extended downturn. Occupancy rates in 2020 lagged behind 2019 by 40%, and showed no signs of near term improvement. Even a number of large hotels, like the historic Roosevelt Hotel in New York City, have shut their doors, and may find themselves in the foreclosure rolls in 2021. e Rental Market: ere's also likely to be some short-term disruption in the apartment or multifamily sector due to the recession and the eviction bans put in place by the federal, state, and local governments. ere are a lot of building owners in those sectors who are highly leveraged and who are unable to collect rent right now since their tenants are out of work—a toxic combination, which will probably lead to some distressed rental properties hitting the market. e single-family rental (SFR) market so far hasn't suffered much from missed rent payments, but that could change if the recession continues or worsens. Over 90% of SFR properties are owned by mom-and-pop investors without the deep financial pockets of institutional investors. An uptick in job losses among their higher-income renters, or the expiration of government stimulus and enhanced unemployment benefits could result in more defaults among these rental property owners. WHY DEFAULTS MAY NOT LEAD TO FORECLOSURES When borrowers default on a loan, it's not unusual for the default to be resolved before the foreclosure. Loans are re-instated or refinanced, or the property is sold and the debt retired before the foreclosure auction. For financially- distressed homeowners today, market dynamics provide a much better environment than what we saw during the last recession. A primary difference this time is that homeowner equity is at an all-time high: over $6.5 trillion. According to RealtyTrac's parent company ATTOM Data, about 70% of homeowners have more than 20% equity. Other published research has indicated that more than 90% of borrowers in forbearance have more than 10% equity in their properties. Homeowners with ample equity in a housing market characterized by historically low inventory of homes for sale, historically low mortgage rates and strong demand should be able to sell their properties—perhaps at a modest discount—in order to avoid a foreclosure. So even as we see the number of defaults increase as the forbearance program ends and foreclosure moratoria eventually expire, the record level of homeowner equity means that the overwhelming majority of distressed assets are likely to be sold well before the foreclosure auction. ose same market dynamics also favor mortgage servicers and noteholders who find that foreclosure is the only option for some of their borrowers. Investors are eager to purchase properties at foreclosure auctions or as REO assets on the open market, and use sites like RealtyTrac to find, analyze, and target properties they plan to fix-and- flip or buy-and-rent. Competition between traditional homebuyers, individual investors, and institutional investors should drive up sales prices and shorten hold times, which helps servicers minimize losses for their clients e biggest challenge for default servicing professionals is going to be effectively managing the enormous volume of borrower contacts—and the subsequent loss mitigation processes associated with millions of delinquent loans—once the government moratoria and forbearance programs expire. Staying compliant with frequently-changing state and local foreclosure regulations will add a layer of complexity as well. e bottom line is that although the number of foreclosures is unlikely to approach the levels seen in the Great Recession, there's a huge wave of default activity coming that will wipe out servicers who don't plan ahead and make sure they have the people, processes, and technical resources ready to meet the challenge. A 20-year veteran of the real estate and mortgage industries, Rick Sharga is the EVP of Marketing at RealtyTrac, the country's leading provider of foreclosure information for investors, consumers, and Real Estate Professionals. Prior to his role with RealtyTrac. Sharga founded CJ Patrick Company, a consulting firm that helps real estate, financial services, and technology companies develop a position of competitive advantage and use it to drive business strategy, marketing, and sales. Sharga also has experience as CMO at Ten-X and Auction.com and EVP at Carrington Mortgage Holdings. Even as we see the number of defaults increase as the forbearance program ends and foreclosure moratoria eventually expire, the record level of homeowner equity means that the overwhelming majority of distressed assets are likely to be sold well before the foreclosure auction.

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