Bankers’ Hours column: Waiting to see what will happen when mortgages come out of forbearance
We’ve all heard the old saw about generals “preparing to fight the last war.” Meaning they plan for the next one by studying the last one. That’s never really worked; even in prehistoric times, I’d guess the tribe with the best spear throwers and spears got a shock when their mortal enemies on the other side of the mountain appeared with those new-fangled bows and arrows.
The Japanese Empire planned and executed probably the most successful tactical attack in military history. Problem was, they sunk the battleships; the carriers were out to sea, and those ships won the war in the Pacific.
This came to mind when I got an invitation to a seminar that will feature a panel analyzing what will happen when the 7 million plus mortgages come out of forbearance in June. Short sales are said to be one of the agenda items. You remember short sales from 2008, right? A lender forecloses, and the property is worth less than the outstanding loan, so the lender sells the property, and then files a deficiency judgment against the borrower for the difference in the sales price and the outstanding loan.
It’s an urban myth that lenders leap to foreclosure. They don’t, and there’s a reason: There’s never been a good foreclosure for mortgagee or mortgagor. There are at least two overriding elements that make this so: First, if, say, in Colorado a bank is the successful bidder at the public trustee auction, it means that the property isn’t worth more than the lender’s loan. And second, every minute spent on working a foreclosed property is a minute that you’re not spending making money with your business model.
And there’s a law that indicates that short sales may be in short supply in 2021-22: the law of supply and demand. Real estate markets are booming, especially in the western states, and it’s not simply because the elite want to move to Aspen and work remotely. Housing is in short supply due to years of sharply escalating material costs, as well as a scarcity of skilled and semi-skilled labor. And with many local governments short of money, land and development costs have risen dramatically. A housing crisis appears to be on the horizon, despite a generally healthy housing market. Has that ever happened before? My readers (all three of them) are a lot smarter than I am; maybe they can enlighten me on that one.
It’s likely that lenders will work with borrowers through modifications; it’s good business. Also, they’ll do this because they can. Regulators realize that the mortgages with deferred payments are not the result of borrower fraud, lender stupidity, greed or all of the above. They’ll work with lenders, unlike 2008-9, when the regulatory mindset was, “So you’ve got a few billion of toxic mortgages that you knowingly made to borrowers with insufficient income to make the payments? No problem, we’ll be in your parking lot at 5 on Friday to change the locks and give you time to clean out your office.”
Loan servicing departments will almost certainly experience a bit of chaos, as we’ve predicted previously, but borrowers and lenders will get through it. They won’t like each other much, but they’ll persevere.
Holders of mortgage paper know that their collateral has value, quite likely more value than the loan on the home. If the property has to be marketed because of COVID-19 crash circumstances, it makes sense, from a lender’s perspective, to let the homeowner do the heavy lifting. Then your loan officers can make new loans and bring in revenue.
This isn’t your father’s recession, and whatever happens in June to those 7 million home loans coming out of the safe harbor of forbearance, won’t be your great uncle’s housing bubble. If we’ve learned anything in recent years, and especially in the last 12 months, we won’t be surprised by whatever does happen.
Shocked, maybe. Surprised, no.
Pat Dalrymple is a western Colorado native and has spent more than 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His e-mail is firstname.lastname@example.org.
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