We are nearly eight years removed from the beginnings of the foreclosure crisis, with over five million homes lost. So it would be natural to believe that the crisis has receded. Statistics point in that direction. Financial analyst CoreLogic reports that the national foreclosure rate fell to 1.7 percent in June, down from 2.5 percent a year ago. Sales of foreclosed properties are at their lowest levels since 2008, and the rate of foreclosure starts—the beginning of the foreclosure process—isat 2006 levels. At the peak, 2.9 million homes suffered foreclosure filings in 2010; last year, the number was 1.4 million.
But these numbers are likely to reverse next year, with foreclosures spiking again. And it has nothing to do with recent-vintage loans, which actually have performed as well as any in decades. Instead, a series of temporary relief measures and legacy issues from the crisis will begin to bite in 2015, causing home repossessions that could present economic headwinds. In other words, the foreclosure crisis was never solved; it was deferred. And next year, the clock begins to run out on that deferral.
The problem comes from many different angles. First, as the Los Angeles Times reported recently, home equity lines of credit—second mortgages that homeowners took out during the bubble years, essentially using their homes as an ATM—will start to feature increased payments, as borrowers must pay back principal instead of just the interest. TransUnion, the credit rating firm, estimates that between $50 and $79 billion in home-equity loans risk default because of the increased payments, which could add hundreds or even thousands of dollars to payments a month.
Home equity resets will be concentrated in areas most affected by the housing bubble, because that’s where the most lending took place. These are precisely the areas whose economies remain depressed by the housing bust. So many of these borrowers will be unable to afford increased payments, given the continued high unemployment and stagnant wages in their regions.
That’s only one of a number of scheduled payment resets in 2015 and beyond. The government’s Home Affordable Modification Program (HAMP) provided only temporary interest rate relief to borrowers, and after five years, that relief runs out, with interest rates gradually rising about 1 percent each year. Over 319,000 of these rate resets begin in 2015, according to a report from the Special Inspector General of the Troubled Asset Relief Program (TARP). The architects of HAMP expected the economy to recover by now, but continued sluggishness means that the rug could be pulled out from homeowners before they’re ready for higher mortgage payments.