Foreclosures and Unemployment: What Does the Past Tell Us About Our Future?
Brian A. Potestivo, Potestivo & Associates, P.C.; and
Leon LaBrecque, Sequoia Financial Group
The COVID-19 crisis has upended the U.S. economy, creating the biggest drop in gross domestic product (GDP) in decades. Commensurate with the drop in GDP is a corresponding rise in unemployment that is unlike any prior increases in unemployment. Unemployment is a significant factor in foreclosures, as is evidenced by prior studies by the Federal Reserve Bank of Cleveland.
In their 2010 study, the Cleveland Fed found that during the global financial crisis, states that had large increases in their unemployment rates also exhibited higher foreclosure rates. Expanding the scope of their analysis, we looked at this relationship going back to 1980. This relationship can be seen in the following chart, which shows the quarter-on-quarter change for foreclosure starts versus the unemployment rate (shaded areas are recessions).
On further examination of the data, there appears to be one major takeaway – in recessionary periods, unemployment and foreclosures track each other closely. However, the time lag between these two variables appears to be contingent on the recessionary period.
In the early 1980s recession, we saw foreclosures and unemployment went hand-in-hand.
Conversely, with the recessions of 2000 and 2008-09, we see that an increase in foreclosures preceded changes in unemployment.
In 2008-09, the unemployment rate lagged the foreclosure rate, likely because the recession was precipitated by the mortgage crisis.
But what does this all mean for the current situation we are facing? The COVID-19 pandemic has brought about economic challenges that we have not seen in a century. Rather than a traditional recession, where foreclosures have preceded or tracked unemployment, we have seen unemployment skyrocket while foreclosures have fallen. This is primarily due to the foreclosure moratorium, which extends as of the publication of this article.
Why 2020 is different. For a number of reasons, the recession of 2020 will likely be significantly different than past recessions. First, and perhaps most notably, there is a moratorium on foreclosures as a result of Congressional stimulus packages and federal agency declarations. According to recent statistics, foreclosures are down 84% year over year, as the moratoriums have substantially halted most foreclosures. The Department of Housing and Urban Development (HUD) extended the moratorium on certain Federal Housing Administration (FHA) mortgages (approximately 8.3 million units) until December 31, 2020. The Federal Housing Finance Agency (FHFA) has done the same for certain Fannie Mae and Freddie Mac mortgages.
The second reason the recession of 2020 will likely be different is due to the substantial unemployment stimulus made available by the CARES Act. The stimulus, in the form of federal unemployment supplements of an additional $600 per week from March 23, 2020 through July 31, 2020, provided significant financial support to individuals and families. Additionally, there are currently replacement supplemental unemployment insurance programs in place; although, none seem to attain the level of the original additional $600 per week.
Future stimulus programs will likely be less than the Pandemic Unemployment Assistance provided by the CARES Act. Another thing that is becoming clear is that employment composition and levels will not return to their pre-COVID-19 levels in the immediate future. Many jobs, particularly those in the hospitality and service sectors, are likely to be permanently eliminated. Post-stimulus, there will probably be a new ‘nominal’ unemployment rate that will stabilize as people return to jobs that exist.
For 2020-21, the likelihood of a surge in foreclosures post-moratorium is substantial due to the build-up of loan delinquencies during the moratorium period. Assuming prospective defaults are even at early levels, this suggests a 15,000 per month ‘build.’ This is simply taking the early 2020 rate and applying it to the current number of months in the moratorium. Quite likely the ‘build’ is substantially more than 15,000 per month. The Cleveland Federal Reserve predicts that we will have a nominal unemployment rate of 6-7.5% post-COVID-19. This suggests that there would be a new foreclosure rate that is 60-90% higher than it is currently, suggesting a rate of 32,000 to 38,000 foreclosures per month. This provides a possible ‘lag’ of 120,000-135,000 foreclosures if we apply the pre-COVID-19 rate, or a substantially higher lag of 300,000-400,000 if the unemployment/foreclosure correlation bears true.
In any event, lenders and servicers should be preparing for the inevitable onslaught of foreclosure filings. Unless Congress permanently passes legislation on foreclosures and the accompanying issues of property rights, the level of foreclosures will continue to mount and the filings will be substantial.
Brian Potestivo, President and Managing Attorney of Potestivo & Associates, P.C, founded the firm in 1990. Through years of hard work, dedication, and prudent decision making, Brian has grown the firm from a single person practice to a sizable organization with offices in two states. Although the firm has grown in size, Brian has managed to keep a firm hold on the core values of the firm, and he continues to ensure that Potestivo and Associates focuses on understanding the goals and business objectives of its clients. Even during tough times and in unprecedented situations, such as the Covid 19 pandemic, Brian continues to strive to understand the challenges of the new marketplace, and he ensures that Potestivo and Associates works diligently with clients to meet business needs and implement successful solutions.
Leon LeBrecque, Chief Growth Officer for Sequoia Financial Group, is a practicing attorney, CPA, CFP® and CFA. In the finance industry Leon is not only known for his well-honed financial acumen, but also for his dedication to financial literacy and his keen ability to nurture the financial well-being of others. He has been featured in media outlets such as Forbes.com, Reuters, InvestmentNews, CNBC, and USA Today. In addition to financial planning, tax law, and investment strategy, Leon also specializes in the Michigan economy. In times such as these, he believes it is important to gain and disperse knowledge in an effort to help combat and mitigate the potential for negative financial ramifications.