Article Courtesy of The Palm Beach Post

By Alexandra Clough

Published November 24, 2020

The phones aren’t ringing, foreclosure defense attorneys say.

The mortgage defaults aren’t happening, analysts agree.

But don’t get complacent, they warn. In a year, the pandemic-induced recession could lead to massive foreclosures in Palm Beach County.

“Judgment day is coming,” said Gary Nagle, a Juno Beach lawyer and attorney for the Palm Beach Board of Realtors.

The key issue that will affect mortgage foreclosures is the job market.

Palm Beach County's economy, like much of Florida, has been hit hard by job losses caused by the pandemic, particularly in the tourism industry, the county’s second biggest industry after agriculture. Hotels and restaurants are open at limited capacity after being shut for two months. But even with some businesses now open, many people remain reluctant to enter indoor spaces due to the airborne nature of the novel coronavirus.

As a result, thousands of people in Palm Beach County have lost their jobs, and it's not clear when those jobs will return.

Palm Beach County's unemployment rate rose to 11.6% in July, up dramatically from 3.6% during the same month in 2019. The state's unemployment rate was 11.3% in July, also way above the 3.1% rate in July 2019.

Job losses are a key economic indicator watched by the Mortgage Bankers Association.

"The extremely ... high level of unemployment remain a concern, and are indications of the challenges many households are facing,” said Mike Fratantoni, the association’s senior vice president and chief economist.

Washington’s chief response to the economic fallout from coronavirus, the CARES Act, allowed homeowners affected by the pandemic to ask lenders for a pause in their mortgage payments on federally-backed loans. That pause, known as forbearance, can last up to a year. During this time, lenders cannot foreclose on a property. Many lenders holding mortgages that are not federally backed also are working with borrowers to pause payments.

The Palm Beach County clerk's office does not separate commercial from residential mortgage foreclosures. Nevertheless, it's clear this year that lenders are holding off on all types of foreclosures: From March to July, there were 621 foreclosures filed in Palm Beach County, compared to 1,462 during the same period in 2019.

Homeowners have seized on the forbearance program. The Mortgage Bankers Association estimates that 3.6 million homeowners nationwide are in forbearance plans.

In addition to the federal program, Gov. Ron DeSantis put a halt to new foreclosure filings until the end of August. At press time, it was unclear if that provision would be extended another month, as it has during the past couple of months.

Regardless, housing experts and lawyers said the underlying economic conditions are only delaying what is expected to be an onslaught of foreclosure filings next year. That event could mean a massive transfer of home ownership from individuals to investors, similar to what occurred during the 2007-8 recession, when individual and institutional investors bought up homes that had fallen into foreclosure, experts said. Those homes, in turn, were transformed into rentals and permanently removed from the inventory of for-sale homes in the county.

Unlike the prior recession, however, homeowners will not fall into foreclosure due to the prevalence of risky mortgages and poor bank underwriting standards, analysts said.

Instead, homeowners will suffer because they will be unable to find jobs. This will occur because of reduced economic activity in industries such as tourism, as well as the permanent removal of jobs from industries such as retail. Since the pandemic began, a number of national retailers have filed Chapter 11 bankruptcy and shuttered stores.

Nagle said he is starting to counsel homeowners on what to do if they remain jobless for some time.

"If they can't afford the house they're in, they've got to make a hard life decision: 'Do I cash out with some equity and go rent until things get better?'" Nagle said. "That way, you can save your credit rather than getting a foreclosure judgment. I've told that to some people."

Brad Hunter, president of Hunter Housing Economics in West Palm Beach, said the pandemic has affected people differently. Those with white-collar jobs have been able to keep their jobs and work from home, Hunter said. But those in lower-paid service jobs cannot work from home, and those are the jobs that have been cut the most.

“My analysis suggests that while we will not see foreclosures nowhere near what we saw in 2007. But there will be some, and they will be disproportionately weighed at the lower end of the economic spectrum,” Hunter said.

Real estate lawyers said they at first expected to see a big rush of foreclosures this year.

“When the pandemic started, we all started talking in attorney groups and said, ‘Let’s ramp up. It’s going to be like 2008 and 2009 again,’" said Christian Posado, a Lake Worth attorney who handles foreclosure defense and bankruptcy cases. “But nothing came. The phones aren’t ringing.”

Posado and others attribute federal stimulus money, unemployment payments and mortgage forbearance rules for preventing a rush of foreclosure filings by banks and mortgage servicing companies.

But everything in the economy is tied together.

So now that the stimulus payments have ended, people are cutting back on spending so they can pay the basics, such as the mortgage and the electric bill, Posado said. That trend, in turn, harms companies such as restaurants and other retailers that employ people who have mortgages, too.

“It’s a dormant situation right now, and everyone is white knuckling it, worried not only about their health but what the outlook is going to be, and are we going to have a job tomorrow,” said Sean Koplow, a Lake Worth attorney who handles foreclosure defense cases.

Nagle, the Juno Beach lawyer, said banks and mortgage servicers have been good about working with homeowners seeking forbearance on their mortgages. Not only is forbearance a provision of the CARES Act, banks also are reluctant to redo the “fiasco” of the last recession, when banks were overwhelmed by foreclosure cases that dragged on for years, Nagle said.

But Koplow said homeowners need to proceed with caution when working with their mortgage servicers on forbearance plans.

In some cases, banks are tacking on unpaid mortgage payments to the end of the mortgage term. In other cases, banks want homeowners to pay the unpaid payments all at once when forbearance ends. “It’s somewhat unclear and varies lender by lender,” Koplow said. “Some (lenders) do tell you, and some of them don’t.”

Of course, for home sellers, and those working in the real estate industry, there’s never been a better time to sell a house. Record sales are taking place, and the island of Palm Beach alone has seen a surge in sales this summer.

The migration to Florida from dense, urban states in the Northeast, Midwest and even California is the reason for the vibrant market, analysts said.

People already were moving to Florida prior to the pandemic due to the state's favorable tax environment. But the pandemic has prompted some people to flee to the Sunshine State, and Palm Beach County in particular, because Florida cities are not dense as some cities in the Northeast, and people here do not have to rely on crowded public transportation, where the coronavirus can spread.

“Florida is greatly benefiting from the exodus from the Northeast, and it will continue over time,” said Jack McCabe, of McCabe Research & Consulting in Deerfield Beach. Consequently, home values are unlikely to tumble as they did during the 2008 recession, McCabe and other housing experts said.

In fact, if home values stay strong but jobs do not return, people will be unable to stay in Palm Beach County and will be forced to leave the county because they no longer will be able to afford to live here, McCabe said.

Because of business consolidation in a number of industries, Koplow said even some people in white collar jobs who have a job today may not have one tomorrow. As a result, “I do think there will be a rise in foreclosures and lawsuits in a year’s time,” Koplow said.

"I don’t think people understand the severity of what’s going on,” McCabe said. “You're going to be looking at a lot of people who never thought they would be homeless in their life come face to face with some dire circumstances.”

Homeowners struggling to hold on to their houses also should not expect to be able to linger in their residences for years, as was the case during the recession, when courts were choked with foreclosure lawsuits that dragged on, Nagle said. The system has become faster, and the courts are not likely to get the same volume of cases next year as they did during the prior recession.

Peter Zalewski, director of acquisitions for Miami-based Brickell Ventures and a housing analyst, said he frequently talks to bankers about their plans for handling foreclosures next year.

Right now, banks are mostly worried about commercial mortgages on properties such as shopping centers and office buildings, where tenants have been badly hurt by the pandemic and in many cases, have stopped paying rent to landlords who have mortgage loans on properties, Zalewski said.

Most banks expect a banking crisis to hit in the fourth quarter of 2020, when it "hits the fan on the commercial side," Zalewski said. "They're calling it the Big Short 2.0."

As far as houses are concerned, banks are readying to move "aggressively" on the foreclosure process, an action that likely will prompt alarm among bank regulators, Zalewski said. With both commercial and residential mortgages in trouble, Zalewski said bankers could be hoping for another bank bailout, as was the case after the prior recession.

"The lesson learned for the overall economy is once the residential goes bad, it snowballs," Zalewski said.

But as was the case during the last recession, Palm Beach County might see a big influx of homebuyers: Wealthy private investors with cash to spend, and big institutional homebuyers, such as Invitation Homes, created by Blackstone Group, the giant private equity firm, Zalewski said.

Another potential player could be the home-listing site Zillow, which now buys houses fast with no real estate agent involved, Zalewski said.

As a result, working people who want to buy a house in the next few years may be unable to compete with large and cash-rich homebuying companies that can pay top dollar for properties.

Therefore people will be forced to rent, “continuing the long-term shrinking homeownership rates and the increase in rental rates,” McCabe said.