Real Estate Research provides analysis of topical research and current issues in the fields of housing and real estate economics. Authors for the blog include the Atlanta Fed's Jessica Dill, Kristopher Gerardi, Carl Hudson, and analysts, as well as the Boston Fed's Christopher Foote and Paul Willen.
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July 2, 2020
An Update on Forbearance Trends
So far, the principal policy response to the COVID-19 pandemic in the U.S. mortgage market has been forbearance. On March 18, 2020, the Federal Housing Finance Agency (FHFA) directed the government-sponsored enterprises (GSE) Fannie Mae and Freddie Mac to suspend foreclosures on single-family mortgages and start offering forbearance and modification plans to distressed borrowers.1
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law on March 27, codified the Fannie Mae and Freddie Mac forbearance programs, and included the government housing agency Ginnie Mae. The act directed the agencies to grant borrower requests for forbearance "with no additional documentation required other than the borrower's attestation to a financial hardship caused by the COVID-19 emergency..." In general, servicers of loans not covered by the law have set up similar forbearance programs.
What is mortgage forbearance?
Mortgage forbearance means a mortgage lender (that is, the holder of credit risk) allows a borrower to stop making mortgage payments for a fixed period of time. During that time, the lender does not charge late fees nor initiate foreclosure proceedings but does consider the borrower delinquent on the loan. Under normal circumstances, the lender would report the delinquency and the forbearance plan to credit bureaus. Under not-so-normal circumstances, including natural disasters, lenders often do not report loan status to credit bureaus. The CARES Act explicitly stipulates that forbearance resulting from the COVID-19 pandemic cannot negatively affect a borrower's credit score, so lenders cannot report borrowers in forbearance as being delinquent.
Once the forbearance period expires, the borrower has to make up the missed payments. For example, if the lender implements a six-month forbearance policy, then borrowers would be allowed to defer all payments for up to six months. After the forbearance period ends, the borrower and lender would typically negotiate a repayment plan that makes the lender whole in the long run but does not send the borrower back into distress. During this COVID-19 forbearance episode, Fannie, Freddie, and Ginnie Mae must provide borrowers affordable repayment options, such as converting the arrears into a partial claim, which is a non-interest-bearing second lien due at termination of the loan.
Forbearance is meant to provide short-term relief to financially distressed borrowers without inducing moral hazard by borrowers who do not need assistance. Since no debt is forgiven, the policy, in theory, should not appeal to borrowers who are not liquidity-constrained. Nevertheless, some empirical evidence indicates that some borrowers may be willing to engage in this "strategic forbearance."
While an acceptable exit strategy exists for borrowers, it is contingent on employment and income being restored before the forbearance period ends. For mortgage servicers, the magnitude of forbearance take-up is crucial to their liquidity—especially for nonbank servicers.
A liquidity squeeze arises because mortgage servicers must advance scheduled principal and interest payments to investors regardless of whether the borrower is paying. In addition, servicers must also pay tax and insurance payments.2 Either the borrower or guarantor will eventually reimburse the servicer, but in the short run, servicers must have sufficient liquidity to be able to bridge this gap. Such a squeeze is especially acute for nonbank servicers who not only are relatively thinly capitalized but also do not qualify for liquidity support programs that have been set up for banks. While this was a concern early in the pandemic, the GSEs and Ginne Mae have implemented polices that have helped to alleviate liquidity concerns of nonbank servicers.3
Forbearance take-up rate
In March, estimates of the fraction of households that would use forbearance in the coming months varied widely. On the one hand, optimists believed forbearance take-up would be fairly low because the CARES Act called for a generous increase in unemployment insurance benefits, which should provide many unemployed households with enough income to continue making payments. For example, FHFA director Mark Calabria estimated that only about 2 million GSE borrowers—a take-up rate of less than 5 percent—would seek forbearance.4
On the other hand, pessimists believed the numbers would be significantly higher. Laurie Goodman of the Urban Institute predicted that close to 12 million borrowers would request forbearance, and Mark Zandi of Moody's Analytics predicted that around 15 million households, or roughly 30 percent of mortgage borrowers, would miss payments.
To gauge the extent of forbearance, the Mortgage Bankers Association (MBA) recently initiated a weekly Forbearance and Call Volume Survey of its members. The survey provides a lagged picture of forbearance rates. The latest survey covers more than three quarters of first-lien mortgages, so we believe it is representative of the overall market.
The earliest data from the survey indicate that as of March 8, 2020, the forbearance rate on all loans was below 1 percent, with both Ginnie Mae and Fannie/Freddie loans having forbearance rates of less than one quarter of 1 percent. Forbearance rates rose in the month of April, according to the survey (see the chart). On April 26, overall forbearance rates were at 7.55 percent, up by more than 480 basis points since the beginning of April. The rate of increase slowed in May, and the most recent survey (June 21) shows that the overall take-up percentage fell from the previous two weeks, going from 8.55 percent to 8.47 percent and marking the first decrease in the survey.
The data also indicate that there is significant heterogeneity across market segments. The rate for Ginnie Mae loans, 11.83 percent, has been flat for four weeks, while the rate for Fannie and Freddie loans, 6.26 percent, has fallen over the past three weeks. The rate for other loans—including those in private label securitizations (not government guaranteed) and held on portfolio—is 10.07 percent, which is essentially flat for the month of June. For Ginnie loans, this means an increase of more than 1,000 basis point since March 8.
Overall, the actual take-up rates are squarely between the optimistic and pessimistic forecasts.
The forbearance take-up rates remain elevated, but recently, they have been flat or have fallen. This pattern is consistent with what we've seen in the labor markets—the rate of new unemployment claims has been fallen while the number of unemployed continues to be elevated. The generous increase in unemployment insurance benefits in the CARES Act certainly has helped take-up rates to be lower than the pessimistic forecasts. But the threat that forbearance will transition to foreclosure has regained power because the number of COVID-19 infections is increasing and the CARES Act unemployment insurance benefits will expire at the end of July.
1 [go back] You can find the official press release on the FHFA website. On the same day, the Department of Housing and Urban Development (HUD), in consultation with the federal government, implemented a 60-day moratorium on foreclosures and evictions for single-family homeowners with FHA-insured mortgages. In addition, HUD encouraged FHA mortgage servicers to offer various loss-mitigation options to distressed borrowers. The options include short- and long-term forbearance options and mortgage modifications.
2 [go back] Servicers of agency loans are required to maintain first-lien status for the GSEs. This implies ensuring that the borrower has paid all property taxes, whether an escrow account exists or not, and that, in certain states, the borrower has met homeowner association commitments.
3 [go back] On April 10, Ginnie Mae set up a lending facility that allows servicers experiencing liquidity issues to borrow funds to make forbearance-related principal-and interest advances. On April 21, the FHFA announced that it would limit the requirements for servicers of Fannie and Freddie loans to forward principal-and-interest payments to investors to four months of forbearance.
May 15, 2020
Examining the Effects of COVID-19 on the Southeast Housing Market
To continue to monitor how the COVID-19 crisis is affecting housing in the Atlanta Fed's district, we conducted a Southeast Housing Market Poll from April 24 to May 1. Respondents included homebuilders and residential sales agents (referred to here as brokers).
What are builders and brokers seeing?
The majority of Southeast brokers and builders indicated that home sales came in below their plan for the period, down from both the month-ago and the year-ago levels.
Most builders and brokers also reported that buyer traffic was down relative to the month-earlier and the year-earlier levels. As the results of the special questions continue to emphasize (see below), buyer traffic appears to be the dimension of business that COVID-19 has most adversely affected through April.
Most brokers and builders indicated that inventory levels remained flat compared to the previous month's levels. Compared to the year-ago level, builders said inventory had increased while brokers noted it was down. Most brokers and builders continued to report that home prices either held steady or were up slightly in April.
Many southeastern builders indicated that construction activity was flat to slightly down in April relative to both the month-ago and the year-ago levels.
Most builders said material prices were flat relative to a month ago. More than half of builders reported increases in material prices from a year earlier. The rest were split evenly between reporting that material prices were flat and reporting they were down. While the majority of Southeast builders reported upward pressure on labor costs, a growing share of respondents indicated labor costs were flat or down from the year-ago level.
The majority of brokers and builders indicated that the amount of available mortgage credit was sufficient to meet demand, though there did appear to be an uptick in the number of respondents indicating a lack of credit (consistent with a slight uptick on the ability to secure financing noted in the special questions; see below). Most builders said construction and development finance was insufficient to meet demand.
With regard to the outlook, the majority of Southeast broker and builder respondents anticipate a decline in home sales activity over the next three months relative to one year ago. The majority of builders continue to expect declines in construction activity over the next three months relative to the year-ago level.
Results from special questions on COVID-19
Last month, the poll's special questions homed in on aspects of business that were adversely affected. This month, we borrowed a few additional special questions from the Atlanta Fed's Business Inflation Expectations Survey to help round out the insights.
First, we asked business contacts to assess the overall level of disruption to construction and sales activity. Results indicate moderate disruption to construction activity (the median builder response was 3 on a scale of 5) and a more significant level of disruption to sales activity (the median broker response was 4 on a scale of 5).
We revisited the special questions from last month on actual and expected adverse impacts. The profile of responses was relatively unchanged from March to April, with many contacts continuing to indicate a major adverse impact on buyer traffic and the number of offers. There was a slight uptick in the share of contacts who reported an adverse impact on delivery time for building materials and the amount buyers were willing to pay.
Lastly, a big question that seems to be on everyone's mind is, "When will things return to normal?" Recognizing that this question is tough to answer with any degree of certainty, we asked builders and brokers to provide their best guess of the number of months until activity returns to "normal."" We also asked builders to indicate how many months they could sustain their business operations until they would have to seek out new sources of funding. Many contacts responded with ranges. The results below reflect the most optimistic responses in the range.
- The median broker respondent guessed that normal sales activity would resume in five-and-a-half months.
- The median builder respondent guessed that normal construction activity would resume in four months.
- The median builder respondent said they could operate for the next six months before they would need to seek out new funding sources (for example, credit lines, emergency loans, debt markets).
We'll continue to keep an eye on the housing situation as it unfolds and report back periodically with updates. In the meantime, feel free to share observations from your local market or questions you'd like to have answered in the comments section below.
This poll was conducted April 24 to May 1, 2020, and reflects activity in April 2020. Thirty-three business contacts across the Sixth District participated in the poll: 15 homebuilders and 18 residential brokers.
April 17, 2020
Southeast Housing Market and COVID-19
Considering the devastating effects the COVID-19 pandemic is having on the economic landscape, we can think of no better time to revive our Real Estate Research blog. Atlanta Fed staff, often in partnership with researchers at other Reserve Banks, are continually working to track and assess COVID-19-related developments as they unfold in the housing and mortgage markets.
With the relaunch of this blog, we intend to regularly publish posts, like this one, with our commentary, observations on recent data releases and survey results, analysis of recently published academic research, findings from working papers we find relevant and interesting, and takeaways from conferences and guest speakers when those events become possible again. We aim to foster dialogue on topical research and current issues in the field with each post we publish and look forward to your active participation and feedback.
Taking the pulse of the housing market
To gauge the impact COVID-19 is having on housing in the Sixth District, we redeployed our Southeast Housing Market Poll from March 26 to April 2 to existing homebuilder and residential sales agent contacts. To get a reference point for comparison, the poll included a combination of routine questions we've posed in the past. It also included special questions to gather more detailed insights on the unfolding situation. This post highlights the results of the poll.
Two-thirds of Southeast builder respondents indicated that home sales came in below their plan for March 2020 and were down slightly from the year-ago level. The majority of broker respondents, on the other hand, said home sales were in line with their plan for the period and were, on balance, flat from the year-earlier level.
Builders and brokers both reported declining buyer traffic relative to one year earlier. As the results of the special questions will emphasize (see below), buyer traffic appears to be the dimension of business that COVID-19 has most adversely affected through March.
The majority of builders reported that inventory levels remained flat from the year-ago level, while brokers said inventory levels were down. Most brokers and builders reported that home prices either held steady or were up slightly in March. Builders and brokers also indicated that the amount of available mortgage credit was sufficient to meet demand.
Just over half of southeastern builders indicated that construction activity during March 2020 fell short of their plan for the period, with the majority reporting that construction activity was flat to down slightly compared to the year-ago level.
Most builders said material prices had increased from one year earlier, but were flat relative to the month-earlier level. More than four-fifths reported some degree of upward pressure on labor costs, and half of pointed to modest increases in labor costs of just 1–3 percent from the year-ago level. The majority of builders indicated that the amount of construction and development finance available was sufficient to meet demand.
With regard to the outlook, all Southeast broker respondents said they expect home sales activity to decline over the next three months. Most builders expect construction activity over the next three months to slow considerably as well.
Results from special questions on COVID-19
Consistent with results from surveys fielded by the National Association of Realtors (like this one) and the National Association of Home Builders (like this one), many Sixth District brokers and builders reported that they had already felt the effects of COVID-19 on their business at the end of March 2020 (see the chart). Buyers' ability to secure financing was the aspect least affected across the Sixth District, followed by the amount buyers were willing to pay for the home. Buyer traffic appeared to be the most significant adverse impact thus far.
We posed the same set of special questions to brokers and builders, but this time asked them to look three months ahead and anticipate the impact of COVID-19 along the same dimensions. Perhaps not surprisingly, the majority of brokers and builders expect the adverse effects of COVID-19 to worsen over the next three months across all dimensions of their business, but especially as it relates to buyer traffic and the number of offers that come in.
We'll continue to keep an eye on the housing situation as it unfolds and report back periodically with updates. In the meantime, feel free to share observations from your local market or resources you are using to the track the situation in the comments section below.
This poll was conducted March 26 to April 2, 2020, and reflects activity in March 2020. Thirty-seven business contacts across the Sixth District participated in the poll: 19 homebuilders and 18 residential brokers.
April 5, 2018
Update on Lot Availability and Construction Lending
"Location, location, location" is a truism associated with residential real estate. What we're hearing from our construction contacts could be another sort of truism: "Labor, lumber, lots." They are referring to the ongoing tight labor market in the construction trades, the skyrocketing price of lumber, and the difficulty of obtaining lots on which to build. While it's true that housing sector fundamentals—employment growth, household formation, tight inventory—continue to support an optimistic outlook, our industry contacts continue to report challenges regarding the supply chain. This post will focus on lots in the Southeast.
Data from MetroStudy indicate the supply of vacant developed lots in the Southeast has steadily declined since 2011 in absolute number and relative to housing starts (see the chart). While the current lot inventory appears similar to 2005 levels, there may be important differences. Anecdotal information indicates that lots are quite scarce, especially in desirable locations. That is, while the number of lots seems healthy, many of the lots developed from 2005 through 2007 were "bubble" lots—they have inferior locations and would not have been developed if not for the frothy environment of the time. When landing in Atlanta, for example, you can see scores of lots around the airport ready to go vertical, but being in the landing path of one of the world's busiest airports does not make the location exactly "prime."
So, the number of lots may be overstated, and the need to develop lots in better locations persists.
We heard of one possible roadblock from our business contacts. In the Atlanta Fed's most recent Construction and Real Estate Survey, the majority of builders continued to report that the amount of available credit for construction and development was insufficient to meet demand. The difficulty in obtaining bank loans, a traditional source of funding for small developers, has made it challenging for them to convert raw land to buildable lots.
Bank lending remains strong
Given the comments on the survey, it seems somewhat surprising that, according to bank call reports, construction lending remains the highest growth portfolio among banks headquartered in the Atlanta Fed's district (which encompasses Alabama, Florida, Georgia, and sections of Louisiana, Mississippi, and Tennessee). Exposures for construction have risen steadily over the past three years as optimism about the economy has increased (see the table).
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In 2005, before the banking downturn, over 80 percent of the banks in the district were reporting construction loan growth year over year, with median growth rates exceeding 40 percent. From the time of the banking downturn through the early recovery, however, construction loan growth turned negative. Banks experienced significant losses on partially finished projects, making them hesitant to lend on other projects. Growth finally turned positive again in 2014. From 2015 to 2017, the percentage of banks reporting year-over-year growth in construction increased slightly, from 61 percent to 65 percent.
Still, the percentage of banks reporting growth in their residential construction portfolio has declined slightly while the overall growth rate of construction loans has dropped from 20 percent in 2014 to just over 13 percent as of December 31, 2017.
Looking deeper into the primary drivers of loan growth, we broke down total construction lending into two categories: Residential 1–4 family construction loans and Other loans, all land development, and other land.
Though the Other category includes all land development, it mostly includes only construction loans for nonresidential and multifamily properties. Loans for development of lots that will have one to four family houses built on them are routinely put in the Residential 1–4 family category of construction loans. What this means is that the data cannot tell us the amount of lending going to develop new lots.
What the data can tell us is that overall construction lending is growing, though at a measured pace and starting from a relatively low level. And anecdotes tell us that the growth is not coming from lot development loans, but, rather, commercial real estate projects and "vertical" residential construction—that is, the actual building of houses.
It is worthwhile noting that, as construction lending growth has progressed, construction as a percentage of capital has drifted towards the point such that the median level for all banks is approaching precrisis levels (see chart).
So while construction loan growth is strong, our industry contacts continue to tell us that not much of that money is going toward lot development. Recent Senate action may make regulatory capital constraints less of a concern, so the smaller community banks in the district may increase construction lending. However, given conversations with banking experts, it does not appear that banks' appetite for lot development loans has improved much since the crisis.
Lots likely will remain relatively scarce, and our contacts will continue their lament of "labor, lumber, lots."
Robert Canova, senior financial specialist, Supervision, Regulation, and Credit Division, and
Carl Hudson, director of the Center for Real Estate Analytics, both of the Atlanta Fed
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