Soaring Home Equity Could Help Prevent a Foreclosure Wave

Homes are worth a lot more these days. That could help more owners avoid foreclosure.

One of the great things about owning a home is getting to build equity. Equity is the portion of a home that its owner owns outright. If your home is worth $200,00, for instance, and you have an outstanding $150,000 mortgage, you have $50,000 worth of equity in it.

Meanwhile, home values and home equity go hand in hand. When property values are up across the board, it gives owners more equity, which they can borrow against via a home equity loan or line of credit. It also puts more homeowners in stronger financial positions in the face of any personal financial difficulties. Such is the case in today's housing market.

Rising equity could help prevent foreclosures

Black Knight reports that overall home equity in the U.S. reached a record high $7.3 trillion as of the end of 2020. Meanwhile, ATTOM Data Systems reports that 17.8 million U.S. homes were, in its words, "equity rich" as of the end of 2021's first quarter. Those 17.8 million homes represent 31.9% of the 55.8 million mortgaged homes in the U.S. That's an increase from 30.2% in the fourth quarter of 2020, and 26.5% in the first quarter of 2020.

Of course, this uptick in home equity would be good at any time. But given the number of mortgages currently in forbearance, it's especially important.

Under the CARES Act, any homeowner who attested to a financial hardship during the pandemic was eligible for mortgage forbearance, during which monthly payments would be paused without negatively impacting borrowers' credit scores. Forbearance was initially slated to last for 360 days, but was extended to 18 months due to the way things progressed with the pandemic.

In the coming months, a large number of mortgages are expected to exit forbearance as that 18-month period runs out. And at that point, there's fear that a wave of foreclosures could ensue if those borrowers are unable to start making their monthly mortgage payments.

A rise in home equity, however, could prevent mass foreclosures. The reason? If homes are worth more money now, it means owners may have an easier time selling them and getting enough money from those sales to pay off their mortgages in full, thereby avoiding falling behind on their home loans and getting foreclosed on.

Imagine a mortgage exits forbearance and the borrower owes $150,000 on it. If the home attached to that mortgage was worth $140,000, selling wouldn't solve the problem if the owner could no longer afford that home; that owner would still not be able to pay off the home loan in full. But if that same home is worth $160,000, that changes everything, and it does give the owner a chance to walk away clean.

Some borrowers who exit forbearance may be more than capable of keeping up with their home loan payments. But for those whose circumstances mean they can't stay current on their mortgages, higher home values and soaring equity allow for selling and starting fresh elsewhere. And that could spare a lot of people from going through foreclosure.