Earlier this week, we considered the latest round of Federal interest rate hikes. Today, we are going to look at what these hikes are likely to mean for both residential and commercial property.
Sadly, it does seem like we will be seeing a good amount of foreclosures moving forward. Lending institutions must prepare for the inevitable and must, as always, ensure they remain in compliance with applicable regulations.
This past January, according to Black Knight, saw a seven-fold increase in residential foreclosure starts compared to the month before. This amounts to about 33,000 loans being referred to foreclosure. In February, according to ATTOM Data Solutions, lenders repossessed 2,634 properties through completed foreclosures, which is a 70% increase from last year.
And, keep in mind, these numbers came before the Fed started its aggressive interest rate hikes, which should ultimately suppress demand and lower, or at least stabilize, home values. While that’s great news or potential buyers who have been frozen out of a hostile market, it’s not great news for people who recently purchased a home over cost because they assumed its value would continue to rise. Soon, it is possible that recent homeowners will find they paid more for their property than its current value, putting their mortgage under water. Such situations typically lead to foreclosures.
“If you’re really trying to be opportunistic and in getting yourself into a home, I think right now you may have some buyers regret a year or two down the road where the same house might be worth 20% less," said business professor Russell Rhoads.
But, again, foreclosures were up in January and February, before the rate hikes took effect. This early 2022 surge can be explained with a little bit of sound reasoning.
Recall that, as COVID triggered lockdowns in Spring, 2020, lenders began offering forbearance (at regulators’ insistence) on mortgage payments to help people avoid foreclosure during the roughest periods of the pandemic. Since then, as people have gotten on their feet, they have suspended their forbearance to get back on schedule with their mortgage payments.
Now, as forbearance runs out, the only people still using it are those who simply could not afford to end it previously. These were the people entering foreclosure at the beginning of the year.
Of course, when talking about foreclosures, residential properties are only part of the equation. Commercial properties are in line for an even bigger foreclosure spree as the weigh of the last two years finally becomes too much to bear.
For commercial properties, the challenges are obvious. First, there is the general downturn in business writ large—from retail to manufacturing to everything in between—owing to lockdowns, supply chain issues, and now inflation. As these pressures start to pull businesses underwater, they will likely default on their leases and leave building owners holding the bag.
Also, consider the rise of hybrid and remote work cultures and the ways it reduces demand for office space.
Commercial real estate, as the economy is pushed into a “soft landing” is likely to be an early and severe casualty.
TrendSource offers two products to help financial institutions through foreclosure proceedings, Property Condition Reports and Occupancy Verification Inspections.
Property Condition Reports support lending institutions and appraisers as they evaluate a property under refinance or foreclosure. With varying scopes of varying depth and detail, TrendSource can help banks and other lenders get boots on the ground and eyes on the property under consideration.
Occupancy Verification Inspections help lending instructions verify the current occupation of a property. This is especially important during foreclosure proceedings, when banks need to ensure that borrowers are not squatting on a property. Occupancy Verification can be both scheduled and unscheduled, giving institutions options as they ensure that properties under foreclosure are, in fact, vacated.
Nobody wants foreclosures. But so long as they remain a fact of life, lending institutions must ensure they remain in compliance. TrendSource helps them do just that.