Don't Bet the Business

It would be an understatement to say that the novel coronavirus, COVID-19, has rocked the globe. The United States remains one of the hardest-hit countries, unfortunately, with no signs of abatement in the near future. 

Most industries have felt the impacts of the pandemic – and real estate is no exception.  While the mortgage industry quickly responded to the initial onslaught of COVID-19, with millions of forbearance plans and nationwide foreclosure moratoriums, indicators show that storm clouds are likely gathering over the industry, and we must prepare for what’s next. 

When COVID-19 hit in earnest in March 2020, with it came stay-at-home orders and mandated closures of entire sectors of the economy, such as bars, gyms and health clubs, salons, retail, restaurants, among others.  While many states were not immediately impacted by these orders and closures, in the months that followed, nearly all states and communities were affected. 

The result, among others, was millions out of work. While some have been fortunate to have since returned to the workforce, many have not, and we are already seeing what may become a parade of giant retailers heading to the bankruptcy courts – Pier 1, J. Crew, J.C. Penny, Chuck E. Cheese, GNC, to name just a few.

With millions unemployed, or underemployed, mortgage delinquency rates jumped quickly.  While 2020 began with record low delinquency rates of 3.2%, that rate nearly doubled by April at 6.1% (the highest rate in four years), then further increased to 7.76% in July.  Now, approximately 1.87 million borrowers are 90 or more days past-due on their mortgage loans – the largest volume since 2011 (while we were still dealing with the aftermath of the Great Recession).   

In response, and in order to halt a likely tidal wave of foreclosures, the federal Government Sponsored Enterprises (GSEs) instituted foreclosure and eviction moratoriums for single-family mortgage loans backed by Fannie Mae, Freddie Mac and the Federal Housing Administration. Initially, these moratoriums ran through May 17  but were subsequently extended to June 30 and then again to August 30. 

While the GSEs back the majority of single-family mortgage loans, significant portions are not government-backed, including subprime mortgages. In recognition of this, and to stanch their wounded economies, many states followed suit by instituting their own foreclosure and eviction moratoriums. In addition, millions of forbearance plans were put in place to offer temporary relief to mortgagors during the pandemic.         

While Michigan did not institute any formal foreclosure moratoriums, due to stay-at-home-orders and other executive orders restricting public gatherings, foreclosure sales were effectively halted in the weeks following the first stay-at-home-orders (in mid-March).  Since then, various counties have begun conducting foreclosure sales and dealing with the backlog of pending sales that had been repeatedly adjourned due to COVID-19.  But some of the most populous counties in Michigan have not yet resumed foreclosure sales resulting in de facto foreclosure moratoriums in what are traditionally the busiest counties for foreclosure. 

In contrast, shortly after the pandemic hit Michigan, executive orders issued by the state’s governor halted residential evictions; commercial evictions have not been prohibited by any executive order.  This eviction moratorium was extended multiple times but ultimately expired on July 15.  With the moratorium lifted, some estimate as many as 75,000 to 80,000 eviction cases will now be filed (Michigan recently ranked 14^th in the U.S. for highest number of evictions). 

However, for the moment, one court which will not be allowing evictions is the 36^th District Court, which hears cases arising in the City of Detroit. The 36^th District Court – likely the busiest district court in the state by volume of eviction cases – instituted its own eviction moratorium beginning July 16 through Aug. 15. 

Due to this expected backlog of cases, the Michigan Supreme Court issued administrative orders to establish new procedures and priority treatment of all eviction cases.  For example, the longer a tenant has not paid rent, the sooner a hearing date will be scheduled, and evictions related to injuries to persons or property will be given highest priority; low on the priority list are cases seeking termination of tenancy unrelated to non-payment.  Further, contrary to traditional procedure where district courts schedule numerous cases at the same time, each case must now be scheduled for a particular date and time and courts are encouraged to conduct hearings remotely. 

The actual operating capacity of the district courts must also be accounted for here. Many district courts around the state are still operating at limited capacity with limited personnel working in-person – all while trying to catch-up on a backlog of all cases before the court, not just eviction matters. Collectively, a considerable amount of time will be needed for the courts to work through this backlog of cases and the timeline for eviction cases, which were once generally “quick” matters, are expected to greatly extend.    

The coming weeks and months will greatly shape the real property landscape in Michigan and nationally. Will the GSE foreclosure and eviction moratoriums be further extended? Will another stimulus package be approved to put money in the pockets of those behind on rent and mortgage payments? Will COVID-19 cases spike, or continue to spike, and require additional stay-at-home-orders? Will the millions of forbearances be further extended (approximately half of COVID-19 forbearances expired in June, approximately one quarter expired in July, approximately 2.2 million forbearance plans are set to expire in September)?

Having lived (and practiced) through the Great Recession and its dramatic impact on the real estate industry, there’s a sense that this is the start of the inevitable downturn that many expected a year or two ago. Unfortunately, sooner or later, we will be facing the eventual aftermath of the foreclosure and eviction moratoriums. When we do, the real estate attorneys at Plunkett Cooney are here to help.