How The Foreclosure Crisis Will Be Different This Time

After the mortgage crisis of 2008, mass property foreclosures followed quickly, leading into what is now remembered as the Great Recession. This year, 2020, the COVID19 pandemic has shut down economies across the United States, threatening to create yet another wave of foreclosures.

But will it be different this time? 

At GLE Associates, Inc. we assisted financial institutions in mitigating the environmental and reputational risk of foreclosures during the 2007-9 recession. The volume was enormous, and it provided us with a front-row seat into what was happening.

And, from our point of view, what we saw then, and what we’re seeing now is different. 

Nobody can predict the future, especially in an environment as volatile as the current time, but we think we will continue to see this foreclosure crisis unfold very differently from last time.

Here’s how–and why.

The COVID Foreclosure Crisis Will Be a Slow Burn

In 2007 and following, what we saw was a sudden and almost instantaneous property crisis, brought on by the failure of subprime mortgage markets. Homeowners and developers alike fell into crisis precipitously, and, despite some failed government efforts at mandating loan modifications, banks began foreclosing according to standard timelines and procedures.  A lack of prior due diligence also opened lenders to greater environmental risks and financial losses. 

The result of this from GLE’s standpoint is that we became very busy, very quickly, with helping lenders determine the environmental and reputational risk of foreclosing on properties.

The crisis of 2020 has been a slower burn so far, and we expect it will continue to be a slower burn. The reasons for this include:

• This potential crisis isn’t caused by a mortgage bubble. In 2007-9, mortgage holders were often already very close to the brink due to the mortgage bubble. It was the mortgage environment itself that caused the recession, so mortgages were hit first and hardest.
• Banks and other lenders this time say that they have been structuring their portfolios to “withstand a downturn,” which gives them more flexibility in responding to the crisis.
• Government assistance has been more robust for small businesses. Programs like the CARES Act and the PPP have helped both individuals and businesses maintain payments.
• Lenders learned from last time. In general, they have been slower to initiate foreclosure proceedings, and have offered more grace on mortgage payments, working with borrowers to attempt to keep them in their properties. This has delayed and will likely mitigate the crisis.
• Additionally, lenders are being more cautious from an environmental due diligence standpoint, which is helping to mitigate risk.

These factors mean that, to date, there have been fewer foreclosures and the projected impact of foreclosures is substantially less overall. Of course, we can’t know what the coming months and years will hold, but we predict that although there will be foreclosures as a result of the pandemic, they will come more gradually than during the Great Recession, and the impacts to lenders and borrowers alike will be less extreme.

COVID Foreclosures Will Involve a Different Mix of Property Types

The 2007-9 crisis involved primarily individual residential properties and multi-family residential subdivision developments. Other property types were affected, but not to the same extent.

This time, the types of properties primarily impacted will likely be more diverse, and include a broader range of commercial property types.

The industries most impacted so far seem to be retail (small businesses and larger anchor stores), tourism and hospitality, restaurants, and event venues. These property types are impacted directly by shut-downs and COVID distancing requirements.

There are other types of properties that have been impacted less directly, but no less substantially. A few less obvious property types that will likely see an uptick in foreclosures:

• Dry cleaners. With many office workers now working from home, there is less need for dry cleaning services. Even though these businesses have largely stayed open through the lock-downs, fewer people have needed their services.
• Office buildings. A contraction in the office building market has already begun, and is expected to continue. Developers who were on the cusp of beginning to lease will continue to be hardest hit.
• Auto repair. With fewer people driving to work and to shop or dine, vehicles require fewer repairs.
• Gas stations and convenience stores. Gas prices are at historic lows, due in part to slashing of prices by producers and overproduction prior to the pandemic, followed by the drastic reduction in driving during the pandemic. While gasoline isn’t the primary profit-maker for gas stations, when folks aren’t stopping for gas, they also tend not to use convenience stores.

The Risks to Lenders Will Be Different

Every property type carries a different profile and level of environmental risk. Dry cleaners, automobile repair, and gas stations are among the highest risk property types from an environmental standpoint, due to the types and quantities of chemicals used in dry cleaning and automobile repair processes, and the presence of underground storage tanks and potential groundwater and soil contamination at gas stations.

Office buildings, retail, hotels, and event venues are likely to carry fewer environmental risks. However, as these buildings remain vacant for extended periods of time without regular maintenance, additional environmental concerns may arise from deteriorating property conditions. These concerns are outside the typical scope of a Phase I Environmental Site Assessment, and may be just as costly to lenders. 

In every case, lenders will need to perform due diligence prior to initiating foreclosure procedures, to mitigate the risk of expensive cleanups, environmental liabilities, and reputational risks. In addition to ensuring the lender doesn’t take on the cost of environmental damage, lenders should also be developing profiles and protocols for when a property should be mitigated, gutted, and resold, or attempts made at repairs, and when foreclosure is not in the lender’s best interest at all.

At GLE Associates, Inc. we bring more than 30 years of experience in helping lenders navigate environmental, reputational, and construction risk. We work with our clients to develop proper protocols for managing foreclosure risks. We recommend that you begin preparing your plans now, and we would love to be your partner in that. 

Contact one of our environmental risk consultants today to learn more.