2020 Ended With 3.4 Million Mortgages in Delinquency

Many property owners fell behind in the course of the pandemic.

Millions of Americans have struggled immensely with bills in the course of the coronavirus pandemic. And that extends to paying their mortgages. In fact, as of the end of 2020, a whopping 3.4 million loans were delinquent to some degree, according to Black Knight. That's a more than 250% increase in loans that are at least 90 days past due from the previous year.

The good news, however, is that foreclosure activity hit a record low last year. We can thank the foreclosure moratorium for that. In fact, the Federal Housing Finance Agency (FHFA) recently extended its ban on foreclosures and evictions to Feb. 28. But once that ban expires, homeowners who are delinquent on their mortgages may be in serious trouble.

Homeowners need relief

The fact that mortgage borrowers have been temporarily protected from foreclosure proceedings is a good thing. The problem, however, is that there will come a point when those bans will expire. Once that happens, those same borrowers run the very real risk of losing their homes.

Mortgage lenders may, and should, be willing to let delinquent borrowers get current on their home loans. The trouble is that many borrowers won't be in a position to do so. A lot of people are still out of work, or are still earning a lower wage than they did before the pandemic began. It could take years for those people to recover financially, and unfortunately, making mortgage payments may just not be possible.

So what can delinquent borrowers do once those foreclosure bans expire? For those who have the option to walk away clean, selling may be their best option. Home values have skyrocketed during the pandemic, despite the economic upheaval that's ensued. We can thank historically-low mortgage rates and increased buyer demand for that. As such, if a delinquent borrower can sell their home for enough money to pay off their mortgage, they'd be able to start afresh with less expensive housing. Plus, they'd minimize the damage to their credit scores.

Those who are underwater on their mortgages -- meaning, their homes won't sell for enough money to repay their lenders in full -- may have more hurdles to jump. One option is to ask lenders to agree to short sales, but lenders may opt to foreclose nonetheless. And unfortunately, the impact of foreclosure can be very damaging from a credit score perspective (namely, foreclosure stays on a credit report for seven years).

Foreclosure is costly, but it may become the only option

President Joe Biden does have a plan in place to provide additional aid to the public. And, there's a good chance mortgage lenders will try to work with delinquent borrowers who've been negatively impacted by the pandemic. Hopefully, those two things combined will do the trick and limit near-term foreclosure activity.

To be clear, foreclosure is a costly, time-consuming process for lenders who aren't in the business of selling homes -- they're in the business of making money on interest payments. But there may come a point when lenders have no choice but to look out for their own interests and start getting repaid one way or another.