How Rising Inflation Costs and Mortgage Rates, Higher Monthly Mortgage Payments, and the Expiration of COVID-Related Forbearance and Mortgage Protection Programs Will Change the Foreclosure Market in the Coming Year
Foreclosure.com Scholarship Program Winning Essay 2023, (Runner up)
By Inaya Simone Gray | Dillard University
The intersection of rising inflation, mortgage rates, mortgage payments and the expiration of COVID-related forbearance and mortgage protection programs will present a challenge for homeowners and the housing market overall during the coming year. There will be imminent changes in the housing foreclosure market during the approaching year, and they will be driven by the interconnection of the aforementioned factors.
Household finances will continue to be affected by rising inflation during the coming year. The continuous increase in the price level of goods and services will decrease the real value of money (Amadeo, 2022), which will reduce individual and household buying power and make it exceedingly difficult for them to cover their expenses and maintain their standard of living. According to a Gallup poll conducted in August 2022, most adults state that rising prices are negatively impacting their household finances, and 12% are experiencing severe financial hardship that are significantly impacting their standard of living (World Economic Forum, 2022). Inflation will have dire consequences for the foreclosure market because families be unable to accumulate financial savings to tap into during times of economic difficulty, which will make it challenging to absorb unanticipated mortgage payment increases. Families will have less disposable income because increasing inflation will lead to increased prices for essentials such as food, energy, and healthcare. Consequently, families will have less money to allocate to mortgage payments, which may increase the risk of mortgage loan default or housing foreclosure.
Historically low mortgage rates that have existed during the last few years are now rising due to the shifting economic landscape. The Federal Reserve has raised interest rates to curb inflation, which has indirectly impacted mortgage rates. Mortgage rates increased more than 50% in six months in 2022 in response to the Federal Reserve’s interest rate increases (Worthington and Haddad, 2023). Increased mortgage interest rates for prospective homebuyers have reduced the demand for new home purchases, and sales have slowed from their rates from just a few years ago (Statista 2023). This will eventually decrease home values which will, in turn, further impact households already struggling to make timely mortgage payments. Current homeowners who have adjustable-rate mortgages (ARMs) will be impacted by even higher interest rates (Pressman, 2023), which have the potential to cause their monthly mortgage payments to exceed their financial capacity and strain their financial stability. This could lead to a swell in mortgage delinquencies and defaults, which could increase housing foreclosure rates. Homeowners who have fixed-rate mortgages may also find it increasingly difficult to make their payments due to a possible decrease in purchasing power.
Significant measures such as forbearance program and eviction moratoriums were installed during the COVID-19 pandemic to protect homeowners from foreclosure. “The CARES Act included a foreclosure moratorium and provided mortgage borrowers with options to temporarily suspend payments during the COVID-19 pandemic. Millions of borrowers took advantage of these protections — particularly Black and Hispanic borrowers, as well as first-time and rural homebuyers” (US Government Accountability Office, 2021). Such protections have expired, and there has been a notable shift in the foreclosure market as inflation has persisted. Those who benefited from COVID-19 forbearance programs have resumed their previous mortgage payments. Those who have been unable to do so due to changing financial circumstances as a result of the economic climate now face foreclosure, which has led to an increase in delinquencies. “The number of foreclosure filings has been climbing since the federal moratorium ended in mid-2021. During the pandemic, an estimated 2 million homeowners fell behind on their mortgages” (Yee and Tanzi, 2023). Government-backed mortgage protection programs are ending, which have left homeowners with limited options for support and leeway to negotiate with lenders in efforts to maintain homeownership. The effects on low-income homeowners have been increasingly severe, especially since their already low incomes have not recovered. Interest continued to accrue on mortgages during periods of forbearance, but lenders will now have to make their standard mortgage payments in addition to the interest that accrued during forbearance. Low-income households may find it especially difficult to make those increased payments. Those who are unable to do so may risk home foreclosure, housing instability, and possible homelessness. Lack of affordable housing complicates the situation further due to the high demand and limited supply of housing in many areas of the United States.
The foreclosure market will likely be transformed by the ever-changing financial climate during the coming year. The combination of inflation, rising mortgage rates, and higher monthly payments have led to increased mortgage delinquency and foreclosure, which increased by 22% during the first quarter of 2023 when compared to same period in 2022 (Yee and Tanzi, 2023). Low-income households will be disproportionately affected by changes in the foreclosure market because they will be less able to absorb increasing prices for goods and services and higher interest and mortgage rates. Seventy-four percent of low-income households are experiencing moderate to severe hardship as a result of inflation (World Economic Forum, 2022). The increase in foreclosures can affect the broader housing market by decreasing property values and reducing housing market liquidity. While federal housing agencies have taken additional steps such as offering repayment options and creating new servicing rules to reduce foreclosures through December 2021 (US Government Accountability Office, 2021), options have been limited since that time. Mortgage lenders should continue to adapt their foreclosure prevention strategies by seeking alternatives to foreclosure. Alternatives can include loan modifications, repayment plans, short sales, or deeds in lieu of foreclosure “to voluntarily convey clear title to the property over to the lender rather than going through a foreclosure” (Loftsgordon, 2023). Extended forbearance options and government assistance or grant programs to prevent foreclosure and assist with housing costs may be additional options worth exploring.
Rising inflation costs and mortgage rates, higher monthly mortgage payments, and the expiration of COVID-related forbearance and mortgage protection programs create challenges for homeowners and the foreclosure market. Rising inflation has gradually impacted household budgets, but the expiration of COVID-related protection programs has led to a more concentrated and immediate impact on housing foreclosures because so many households have been affected in a brief period of time. The possible consequences are dire with the risk of higher foreclosure rates and their disproportionate impact on susceptible, low-income populations. The pace and extent of future housing foreclosures will be driven by government-based housing policy and relief programs, lender practices, and local and national housing market dynamics. Policymakers and lenders should implement proactive measures to ease the consequences, to support homeowners, and to stabilize the housing market in the approaching year.
References
Amadeo, K. (2022, October 9). How inflation impacts your life: Its effect on you and the
economy. The Balanced Money. https://www.thebalancemoney.com/inflation-impact-on-economy-3306102
Loftsgordon, A. (2023). Ten steps you can take to prevent a foreclosure: Ten things you can do
to avoid losing your home in a foreclosure. Nolo. https://www.nolo.com/legal-encyclopedia/ten-steps-you-can-take-prevent-foreclosure.html
Pressman, J. (2023, April 10). How does inflation affect mortgage rates? Money Tips.
https://moneytips.com/how-does-inflation-affect-mortgage-rates/
Statista. (2023). Number of existing homes sold in the United States from 2005 to 2023 (in
million units). https://www.statista.com/statistics/226144/us-existing-home-sales/#:~:text=In%202021%2C%20the%20U.S.%20home,and%20increase%20again%20in%202023.
US Government Accountability Office (2021, July 12). COVID-19 housing protections:
Mortgage forbearance and other federal efforts have reduced default and foreclosure risk. https://www.gao.gov/products/gao-21-554
World Economic Forum. (2022, September 21). American households struggle as inflation
continues — New survey. https://www.weforum.org/agenda/2022/09/inflation-causing-hardship-us-households-money-income/
Worthington, M. & Haddad, R. (2023, January 10). 5 ways inflation is impacting the 2023
housing market. HomeLight. https://www.homelight.com/blog/how-will-inflation-affect-the-housing-market/
Yee, A. & Tanzi, A. (2023, April 19). More Americans are losing their homes as foreclosures on
US properties rise. Bloomberg L.P. https://www.bloomberg.com/news/articles/2023-04-19/foreclosures-on-us-properties-continued-to-rise-in-first-quarter
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