Which US states are prone to mass foreclosures?

Amid soaring home prices, some economies are lagging behind

Which US states are prone to mass foreclosures?

An uptick in home prices has led homeowners to record levels of refinancing, enabling homeowners to tap into their equity for a myriad of projects and earmarks – from college tuition to remodeling. But not everyone has been as lucky, as borrowers face the possibility of seeing mortgages fall underwater or face foreclosure altogether given negative equity distributions.

CoreLogic recently released a study showing a record level of refinancing, with a collective $3.2 trillion in cash being tapped from borrowers’ equities amid soaring home price values. But in certain parts of the country, a troubling number of homeowners either owe more than their homes are worth or are precariously close to a potential mortgage meltdown.

Among the states with the highest levels of negative equity distribution during the third quarter are Louisiana, Iowa, Illinois and Oklahoma, Dr. Frank Nothaft (pictured), chief economist at CoreLogic, told Mortgage Professional America.

A wealth of economic factors have caused certain states to make the dubious list of negative equity distribution. Nothaft pointed to Oklahoma and Louisiana as two markets where economies rely heavily on the energy sector, primarily oil and gas.

“Until recently, energy prices were way down because demand was way down,” he said. The pandemic forced more people to stay home, the economist observed, which led to lowered gas demand – along with widespread layoffs in oil production and exploration. “Oil prices are way up now, but that affected employment and job creation during the economic recovery.” 

Other vulnerable spots simply haven’t seen the kind of economic growth as other regions, the economist said. Some areas have fallen short of the national index of 18% in terms of home value increases, Nothaft said. Take the state of Louisiana: “Home prices are up about 9.7% over the 12 months – from October 20, 2020, to October 20, 2021 – which is pretty good,” the chief economist noted, “but pales in comparison with other states.”

For instance, in Texas – where it’s often been said that everything is bigger – home value prices were up 17.9%. That’s a hair shy of the 18% barometer that serves as CoreLogic’s national index.

Beyond the abstraction of numbers, negative equity statistics point to the possibility of financial exigencies on the horizon in certain markets, the economist agreed. “Areas that do have a higher negative equity are also more likely to see some of those loans go into a distressed sale situation like foreclosures.”

The federal CARES Act provided up to 12 months of forbearance for borrowers negatively affected by the pandemic, enabling a halt in mortgage payments to stave off foreclosures. The program was later extended by six months.

“We’re beginning to see borrowers come to the end of that period, some able to get their jobs back so they can resume making payments on their mortgages,” the CoreLogic economist said. “However, for those borrowers who continue to experience a great deal of financial stress or haven’t gotten their jobs back or the main breadwinner passed away, the end of the forbearance period may not have the finances to get current or pay their mortgage. Those are at the greatest risk.”

The option for such borrowers may be a traditional property sale to avoid foreclosures. “They have very little skin in the game to continue making payments,” Nothaft said. “Even a little equity may not be sufficient to continue making payments.”

Traditional sales could be the only option for such borrowers as a way to avoid foreclosures, an economic event that has a major impact on a homeowner’s credit score. “You always have the option to make a more traditional sale. And then when the time is appropriate and the financial situation improves, they might consider returning to the purchase market,” he said.

Even if all seems lost, borrowers experiencing financial stress should leave channels of communication open with their lenders, Nothaft said in the way of advice. “A lot of borrowers feel uncomfortable doing that as they’re trying to put food on the table and clothe their family members,” he said. “There’s a lot going on with their lives, and they may feel uncomfortable talking to their lenders.”

Suffering in silence is not the way to go, the economist suggested: “The important thing is to really have conversations with lenders,” he said. “No-one wins if a property goes into foreclosure. It affects borrowers’ credit scores and there are substantial losses to lenders as well. It’s in both parties’ interest to get together, and talk as much as possible.”

Nothaft also suggested distressed borrowers seek out HUD-approved financial counselors. “Find one of them in the community, and get their advice on what options are available,” he said. He also advised borrowers to visit the Consumer Protection Bureau website for further resources.

LATEST NEWS