Foreclosure Tragedy of 2022

2008 Equity Crisis vs 2022 Economic Crisis

For the past two years, conversations in mainstream media, Clubhouse or broker meetings have been focused on a lack of foreclosure risks due to the fact “it’s not 2008.” However, that dialogue ignores the current tragedy of 2022.

American homeowners with equity are losing their homes to foreclosure. The majority of homes going to auction in 2022 have equity, yet families are still losing their homes, and opportunities for generational wealth.

In 2008 we had an equity problem. In 2022, we have an economic problem. Equity doesn’t create cash flow. And a refinance isn’t possible with an active forbearance. Add to that higher mortgage balances, inflation and increasing interest rates making a complex, seemingly impossible situation. For an in-depth discussion check out the Clubhouse Real Estate Real Stories replay.

2008 vs 2022 – What’s similar? What’s Different?

There are some similar dynamics, with different elements;

• Wall Street Impact on Main Street - The 2008 Mortgage Crisis was based on Wall Street trading and toxic mortgages. In 2022 we have a massive movement of capital from Wall Street to Main Street acquisitions, including portfolio acquisitions of pre-foreclosure and bank owned properties – before they are publicly listed for sale. These homes are added to rental income portfolios and no longer available for home buyers, reducing already historically tight inventories.
• Escalating Values and “Easy Money” - In 2008, money flowed ceaselessly funded by toxic lending practices. In 2022, the additional capital from CARES ACT funding sources, has added to consumer confidence in paying above asking on home purchases.
• Mortgage Misinformation - In 2008, we all know the story now of toxic, predatory lending practices and the resulting foreclosure crisis. In 2022, misinformation about forbearances caused homeowners to be stuck in a pre-foreclosure pipeline.

What’s significantly different?

• Foreclosures - In 2008, foreclosures were driven by lack of equity. In 2022, they are driven by economic impacts of COVID. The number of foreclosures in 2022 is smaller, and they are cycling through in streams and bursts vs a huge wave.
• U Shaped Economy vs. K Shaped Economy - Two years ago, there was talk about what type of economic recovery we could expect. What was predicted, and what has played out is a “K Shaped Economic Recovery” from COVID. It’s not discussed much in the news, as it’s an unpleasant reality. We have not only the “Upper K” and “Lower K” but many micro-dynamics as offshoots of those stronger trends. The complexity of today’s market makes it impossible to simplify into a sound bite.
• Inventory - During the mortgage crisis and recovering years, there was a massive inventory of homes with very few sales, often running as high as 2 years of inventory. During 2022, inventory remains at historic lows, supporting higher values based on supply and demand.
• Luxury Market - In 2008, the luxury market was hit hard and early in the mortgage crisis. Homes suddenly lost equity and were upside down in value. During 2022, the luxury market remains strong. This is the upper branch of the “K shaped economy.” Dynamics that have evolved such as mobile lifestyles, increase in wealth and crypto currency add to the sustaining demand for luxury homes.

Losing Homes, Equity and Generational Wealth

Amidst a massive buy up of residential real estate by Wall Street institutional buyers in 2022, homeowners going to foreclosure are losing their homes and their equity. American families face a loss of generational wealth as well as their homes. As we discuss the long-tail impact of COVID, we can’t ignore the multi-generational long-tail impact for families going to foreclosure who have equity.

Forbearances

As detailed in the update below, there are over 1.25 Million homeowners in forbearance. Historically, 50-70% of homeowners in forbearance end up in foreclosure. Forbearances initiated during COVID are coming due at different times and will be an issue rolling forward throughout the year. Many homeowners face unexpected surprises when the forbearance ends. Some were initiated with balloon payment terms. Homeowners who were able to adjust to deferments face a larger loan balance and higher monthly payments. Higher mortgages, interest rates and monthly payments combined with job losses creates a seemingly impossible situation.

During the CARES ACT moratorium on foreclosure auctions, institutional lenders streamlined their internal processes and with advanced artificial intelligence they know where the equity opportunities are within their distressed asset pipeline. Auctions are not being postponed as they were in years past. Once a notice of foreclosure is received, time is of the essence.

Ignoring the suffering of these homeowners because “it’s not 2008” is tragic. There are options to try to stop foreclosure and save the home. However, time is of the essence as the banks have sped up the speed of foreclosure since the lifting of the moratoriums in 2021.

Help for Today’s Homeowners

While it may seem the needs of homeowners facing foreclosure are being ignored, there are realtors dedicated to helping our neighbors and friends explore all options to save their homes, and their equity. Personally, I’m connected to a nationwide referral network of agents and HUD counselors ready to help! For more info visit FightTheBank.org and let's talk!