What will the long-term impacts look like?

Albert Einstein once stated, “We can’t solve problems by using the same kind of thinking we used when we created them.”

In response to the coronavirus pandemic and its impact on the economy, new thinking has been employed because of lessons learned from the 1998 financial crisis and the 2008 banking crisis. Both events taught financial industry leaders and the government that extreme measures were necessary to avoid a full-blown financial crisis.

Now, the protections put in place in the beginning of the pandemic as part of the government-backed CARES Act are expiring or receiving last-minute, confusing extensions. The federal foreclosure moratorium, which was created to protect people from foreclosures on their homes, ended July 31 2021. For some, protections are still in place through the federal government. Eviction protections are also still in place through certain programs. Additionally, there are statewide protections in states like New Jersey, where the eviction moratorium was extended through Dec. 31, 2021, for those who qualify.

In short, the protections vary greatly. The point, though, is that many of these protections are coming to an end, which means the mortgage industry is in for a whirlwind future.

Preparing for An Unknown Future

In about four days’ time, the Federal Housing Finance Authority (FHFA) and the Department of Housing and Urban Development (HUD) took swift action to address the impact of the pandemic, an unprecedented world event, through the foreclosure and eviction moratorium. It was created in March 2020 to address the impact the pandemic might have on the housing market.

“Might” is the key word here. Those behind the moratorium were forced to make decisions in regard to an unknown future. Who knew how long the decisions would need to stay in place? Who knew what impact the pandemic would have on our economy and housing affordability?

This is a different kind of financial crisis. Those of you who worked with a lender, bank, investment bank, or fell prey as a borrower to subprime lending as a homeowner during the housing crisis of 2008 likely already know this.

The pandemic-driven economic concerns are not about irresponsible lending. Instead, they have been fueled by a health crisis that pushed the economy into a downward spiral.

As we continue to progress in an uncertain world, what will the long- and short-term impact be?

Disguising the Economic Fallout

The initial forbearance and foreclosure issues were not associated with private lending. The federal moratorium on evictions for non-payment of rent, foreclosure moratoriums, and many government-backed stimulus programs have largely disguised the economic fallout, however.

The fact is many of those who entered forbearance agreements took the option but did not truly need the program. While the post-COVID world is still unknown, one thing is certain: There is a backed-up dam of loans awaiting foreclosure. Although the impact is not expected to be as severe as the 2008 housing crisis, a little fewer than 2 million homeowners are currently in forbearance, according to the Mortgage Bankers Association.

Differing Federal and Local Laws

The mix of federal, state, and local laws will make the maze of discovering opportunities for real estate investors more challenging. One can presume that not all foreclosures will happen immediately or at once, but they will happen. The first on the chopping block will likely be loans that entered into forbearance agreements or were in the middle of the foreclosure process before March 2020.

The government has put tools in place—such as 40-year loan modification terms and pushing forbearance payments to the backend of the loan—to mitigate or prevent servicers from rushing the foreclosure process.

Additionally, you can expect the foreclosure process to vary state by state, and even county by county. Law firms and others who are anticipating confusion have created state-by-state road maps to navigate the mitigation practices and rules, along with the different loan modification practices.

It is expected that certain lenders will be more lenient than others. It’s no secret the foreclosure process is exhausting and requires a large amount of a lender’s time and financial commitment. As a result, some lenders may be willing to work with homeowners to avoid foreclosure.

Exploring the Competitive Housing Market

Higher rents and housing demands set an attractive stage for real estate investors everywhere. As of now, one can predict that the housing market will remain competitive through 2021. Retailers and sellers of homes are holding out and continuing to drive housing prices higher, and there is simply less supply than demand.

Business Insider reported an estimate that the housing market is short 2.5 million homes.

The shortage of homes available has resulted in a highly competitive market, where renting seems safer and faster than buying. The Chicago Tribune recently reported that 18% of American millennials expect to rent forever and have no plans to own a home. This number was closer to 12% in 2020, demonstrating a substantial increase in rental interest. As such, rental market attraction and demand is here to stay.

For small-scale investors, large-scale aggregators, or build-for-rent communities, the investor outlook seems stable and rich with opportunity. The same goes for the borrowing options. Nonetheless, lenders will need to be on their toes to deliver product options and speed-to-close options to support all types of small and large buy-and-hold investors.

When a significant amount of lending paused in March 2020, another housing crisis was feared. The government, however, made effective corrections with home lending after 2008. The loans made after 2008 have proven to be healthier, and the institutions and insurance companies backing these loans have shown they are prepared for growth in this market.

Many of the “Non-QM” and other lenders who survived the lending pause earlier this year are stronger than ever. Many of them are filling the void by offering 30-year DSCR loans that conventional lenders cannot and do not offer. The cash-out options are helping replenish the funds of real estate investors and keeping the investor train moving forward.

In the event we see a dramatic drop in home values, real estate investors as well as private mortgage lenders could find themselves unable to sell or refinance out of the properties. Many private lenders are putting good disciplines in place due to the concerns surrounding pockets of inflated housing prices.

Both scenarios are something to watch over the next 6-12 months.