Worried About Foreclosure? This Key Formula Can Tell You if You're at Risk
Homeowners struggling to make their mortgage payments as a result of the COVID-19 pandemic are better prepared to weather the financial storm than ever before, as rising home values provide options for avoiding foreclosure.
Real estate brokerage Redfin released a new report Monday, analyzing the risk of foreclosure in America’s 50 largest cities. Even in cities hard hit by unemployment and other economic stressors, the risk is much lower than it was during the Great Recession, thanks in large part to super-low loan-to-value ratios.
Your loan-to-value ratio is the share of your home's value that you owe on a mortgage. If you make a 20% down payment, your starting LTV is 80%. Today, the average LTV is 70%, meaning homeowners have built 10% additional equity beyond an initial 20% down payment.
In Las Vegas, for example, the unemployment rate is among the highest in the country and nearly 3% of homeowners there told the U.S. Census Bureau they are somewhat likely or very likely to be in foreclosure in the next two months. However, on average homeowners in Las Vegas have a LTV of 67.9% — one of the lowest in the country — providing plenty of equity to sell or refinance to a lower monthly payment.
“What could put Las Vegas homeowners at risk of foreclosure is a lack of planning for the end of forbearance,” noted Daryl Fairweather, Redfin’s chief economist. “If these homeowners make plans now to refinance or sell they shouldn't be at risk of foreclosure.”
At the opposite end of the spectrum, Virginia Beach has the lowest share of homeowners saying they fear imminent foreclosure at 0.3%. However, the LTV ratio is 86.2%, the highest among all metros Redfin considered.
The difference, says Fairweather, is that Virginia Beach has a large military presence. Many homeowners in the coastal-Virginia city have VA loans, which require very low down payments, explaining the high LTV.
However, the military also provides very stable employment. Virginia Beach homeowners are at a lower risk of foreclosure because most people have remained employed and have not needed forbearance.
| 5 metro areas with high risk of foreclosures |
| Metro Area | % of homeowners who say they are likely to foreclose in the next 2 months | % of Homeowners with income loss | % of Homeowners not current on mortgage payments | Average Loan to Value | September unemployment rate |
| Atlanta, GA | 3.8% | 37.5% | 13.5% | 67.3% | 6.7% |
| Phoenix, AZ | 3.4% | 40.2% | 9.2% | 64.3% | 6.3% |
| Chicago, IL | 3% | 40.6% | 13.6% | 73.1% | 10.5% |
| Indianapolis, IN | 2.9% | 39% | 10.9% | N/A* | 6% |
| Las Vegas, NV | 2.9% | 51% | 10.8% | 67.9% | 14.8% |
| 5 metro areas with low risk of foreclosures |
| Metro Area | % of homeowners who say they are likely to foreclose in the next 2 months | % of Homeowners with income loss | % of Homeowners not current on mortgage payments | Average Loan to Value | September unemployment rate |
| Baltimore, MD | 0.6% | 33.8% | 10.5% | 77.7% | 6.5% |
| Minneapolis, MN | 0.4% | 38% | 6.6% | 74.3% | 5.9% |
| San Francisco, CA | 0.4% | 40.3% | 5% | 56.6% | 8.6% |
| Washington, DC | 0.4% | 33.1% | 9.5% | 74.8% | 6.7% |
| Virginia Beach, VA | 0.3% | 32.6% | 6.4% | 86.2% | 7.1% |
| Source: Redfin, U.S. Census Bureau, Bureau of Labor Statistics. |
Planning is key when exiting forbearance
Established as part of the Coronavirus Aid, Relief and Economic Security Act, forbearance plans granted an initial 180 day period during which homeowners could ask their lender to pause their mortgage payments without affecting their credit scores. The initial forbearance period could be extended for up to 180 additional days upon homeowner request.
According to Fairweather, the risk of foreclosure isn’t tied so much to home values, unemployment, or how far behind a homeowner is in their payments, but to either the lack of planning upon exiting forbearance or the lack of knowledge about options other than foreclosure.
While forbearance plans provide relief from having to make mortgage payments while under economic duress, they don’t eliminate the homeowner’s obligation to repay the paused payments. Once the homeowner exits forbearance, repayment options include adding payments to the end of the mortgage, paying it as a lump sum either when forbearance ends or at the end of the loan term, or adjusting the payment amounts. If the homeowner cannot reach an agreement with their lender for repayment, they could be at risk of foreclosure.
According to Redfin, there will be more than 3.3 million homeowners in distress — borrowers who are behind in their mortgage payments — once the payment deferral programs close to new applicants on December 31. While Fairweather believes there is a chance that the government could extend the mortgage forbearance program, like it recently did with student loan forbearance, homeowners need to start planning their exit strategy now.
How does 2020 compare to 2008?
The last time the housing market was in a foreclosure crisis was during the Great Recession between 2008 and 2010. At that time, loose lending practices led the average loan-to-value ratio reaching 94%. Once the home price bubble burst, homeowners owed almost as much as the full value of their home and sometimes more. The lack of equity meant many homeowners couldn’t sell their homes or refinance their mortgages, leaving them with no other option than to go into foreclosure, noted Fairweather.
Conditions today, however, are very different. More homeowners have the option of refinancing or selling their home to avoid going into foreclosure. According to Fairweather, home values increased 6.7% between February and October, providing homeowners with $2 trillion more home equity than they had before the pandemic. Today, the average loan-to-value ratio is 70%.
“Most people are going to have homes that are worth more and be able to sell and aren’t going to be in a terrible financial position, or they’ll be able to refinance,” said Fairweather.
The severe housing shortage is another advantage for sellers. Competition is so high for affordable homes right now that homeowners who are in distress should be able to sell their homes fairly quickly and avoid going into foreclosure.
“There’s a market built around buying distressed properties and they’ve been on pause too so there’s pent-up demand for these homes as well,” said Fairweather.
While this wave of foreclosures can have a much smaller impact than in 2010, homeowners need to be proactive. Homeowners need to contact their lenders before the end of their forbearance period in order to make these repayment arrangements or decide to refinance or sell.
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