Wave of Mortgage Foreclosures Is on the Way

First the bad news: a mortgage foreclosure crisis is on the horizon. Now the “good” news: recent fiscal policy will prevent a full collapse of the financial system like we saw in the wake of the housing crash in 2008.

“It’s a slow-moving process,” Bill Emmons, an economist at the St. Louis Federal Reserve, said during a presentation on housing insecurity, as reported by The Real Deal. “It definitely looks like there will be another major event, but hopefully not as bad as the foreclosure crisis associated with the Great Recession.”

This time around, however, the financial system won’t collapse, Emmons predicted, thanks to measures taken in recent months which provided liquidity to the market. The Fed announced in March it would buy back $200 billion in mortgage-backed securities, and has signaled that its benchmark interest rate will remain low through 2023, which will in turn keep mortgage rates low.

The actual level of distress is difficult to determine because of eviction and foreclosure bans across the country. But Emmons said the level of past-due mortgages is now at levels seen in the beginning of the Great Recession. Just over 5 million homeowners missed or deferred at least one mortgage payment during the second quarter of this year, as the first wave of the coronavirus pandemic was hitting its peak. The missed mortgage payments totaled $16.3 billion.

The economist also noted that the economic impact of COVID-19, like the virus itself, is harsher on the lower-income segment of the population. Lower-income earners are disproportionately affected by job losses in the service industry. Young, lower-income homeowners with lower education levels have been hit especially hard, even as some sectors, such as luxury homes, show “strength, or even froth,” Emmons said. The rich are not only getting richer, they’re also staying healthier than the rest of the populace.

The uneven recovery has led to a growing consensus around the idea that the recovery from the pandemic will be “K-shaped,” lifting more affluent people out of distress faster while the lower-income population sinks further into poverty.

“Probably the clearest massive supportive income were one-time payments and unemployment benefits, but those provisions expired at the end of July,” said Emmons. “The ‘V-shaped recovery’ has been interrupted.”

And no new economic stimulus money is expected to come out of Washington before the Nov. 3 election.