Among forborne borrowers, strong equity alone not enough to avoid foreclosure

According to Black Knight’s data, just 7% of homeowners in forbearance have less than 10% equity even after taking 18 months of deferred payments into account. But while that would seemingly suggest a group of forborne borrowers that have ample protection against foreclosure down the line, the analytics firm’s research has revealed that may not be the case.

“An analysis of our McDash loan-level mortgage performance dataset back to 2007 shows that holding equity in one’s home might not be a blanket backstop to foreclosure activity,” said Ben Graboske, data & analytics president for Black Knight. “Borrowers with limited equity were much more likely to be referred to foreclosure during the early stages of the Great Recession than those with strong equity positions. But foreclosure start rates on homeowners who were 120 or more days past due have been relatively similar regardless of equity stakes from 2010 on, with borrowers in the strongest positions only slightly less likely to be referred to foreclosure.

“So, while we may see some variation in foreclosure activity based on the equity levels of borrowers who are unable to return to making payments post-forbearance, those with strong equity won’t necessarily be immune to foreclosure referral.”

Graboske did note that Black Knight’s data shows that borrowers with strong equity positions are more than 40% less likely to fall into foreclosure or similar action than those with weaker equity stakes. But even among borrowers with 40% equity stakes who were referred to foreclosure in recent years, 30% still lost their home to foreclosure sale, short sale, deed in lieu, or like actions.

In a nutshell, nearly a third of people who could sell their homes to avoid involuntary liquidation don’t so do — and we’re not entirely sure why.

“What the data doesn’t tell us is why so many people who could avoid involuntary liquidation by selling through traditional channels simply do not end up doing so,” Graboske said. “Whether that’s due to lack of understanding of their equity positions or the foreclosure process in general is unclear.

“But given the large number of high equity homeowners currently struggling to make their payments, this represents a significant challenge for the industry: how to educate struggling homeowners on the post-forbearance, foreclosure and – if needed – home sale processes, to limit unneeded stress on homeowners and the market alike.”


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