What is behind the sharp drop in mortgage delinquencies?
As the summer draws to a close, several topics are at the center of everyone’s concerns: the impact of the Delta variant, the debate on when the Federal Reserve reduce its asset purchases, the situation in Afghanistan and the debate over the federal debt limit and the budget.
When it comes to housing and mortgage markets this fall, most of the attention is focused on expiration of moratoriums on evictions and seizures and the ongoing completion of abstention conditions for many owners.
While the pace of mortgage origination has slowed somewhat this year from a record high in 2020, I expect the service to receive increased attention in the coming year.
With that in mind, I wanted to review MBAthe latest data on mortgage delinquency, foreclosure and forbearance rates and provide my thoughts on the likely direction of these trends.
Data from the MBA’s National Delinquency Survey (NDS) for the second quarter of 2021 showed a sharp drop in the mortgage delinquency rate to 5.47%. As shown in Figure 1, the delinquency rate tends to be strongly correlated with the unemployment rate over time. This was certainly true over the past year, as unemployment skyrocketed at the start of the pandemic, then fell rapidly as the economy reopened and rebounded.
Our forecast is that the unemployment rate will continue to decline, reaching 4.5% by the end of 2021, and is expected to drop below 4% by the end of 2022. The delinquency rate is expected to follow this closely. downward trend.
It is important to note that in the NDS of MBA, loans are marked as past due if payments are not made according to the terms of the mortgage. So even if the loans are past due, if the borrower does not make a payment, the loan is counted as past due. Additionally, if the borrower is forborne but makes a payment, the loan is considered current. This processing corresponds to the actual cash flows that providers receive and therefore captures an important reality for providers of whether the borrower is submitting a payment or whether the provider may need to advance that payment.
Although default rates fell across all categories in the second quarter, as shown in Table 2, the largest drop was in loans over 90 days past due. In fact, the 72 basis point drop in the 90+ delinquency rate was the largest such drop in the history of the MBA survey dating back to 1979.
The 30- and 60-day default rates also declined in the second quarter. The rebound in the economy and the labor market, coupled with successful exits from forbearance for many homeowners, have contributed to these declines, and in particular for those in more advanced stages of delinquency.
Perhaps more importantly, this data also showed the largest quarterly declines in survey history for FHA and VA loans. Last year, the FHA delinquency rate hit an all-time high of 15.65%. The FHA delinquency rate in the second quarter of 2021 fell to 12.77%, almost 3 percentage points lower, but it remains more than 4 percentage points above the pre-pandemic level.
Clearly, FHA borrowers have been hit hard by the onset of the pandemic and the lockdowns that have resulted from it, but the trend is improving.
Foreclosure moratoria were in place until July of this year. With these moratoria in place, it’s no surprise that the start-up rate of foreclosures is extremely low, as only exceptions to the moratoria, such as abandoned properties, have resulted in foreclosure actions. That said, as Exhibit 4 shows, the onset of foreclosure rate remained stable at just 4 basis points in the second quarter, which is essentially zero.
The foreclosure inventory rate, the percentage of outstanding loans that were in the foreclosure process at the end of the second quarter, fell to 51 basis points, the lowest foreclosure inventory rate since 1981. Note that some of these loans in the foreclosure inventory may have been before the pandemic.
To sum up, delinquency rates skyrocketed at the start of the pandemic last year, but are falling rapidly, alongside falling unemployment rates, and the foreclosure inventory rate has fallen to its lowest level in 40 years, at least in part because of the moratoriums. We will certainly be monitoring this data closely over the coming months and quarters.
Trends in abstention and exit prospects
Other critical trends to watch include the share of loans in forbearance and the exit routes of borrowers coming out of forbearance.
As of June 2020, about 8.5% of all mortgages nationwide – over 4 million homeowners – were in forbearance, according to the weekly forbearance and MBA call volume survey. These included both federally guaranteed loans covered by the CARES Act, as well as portfolio loans and PLS loans that were not covered. The abstention data is tracked by investor category (Fannie / Freddie, Ginnie, Portfolio / PLS) and service category (IMB, custodian).
After peaking last June, the abstention share has trended downward most weeks, reaching 3.08% in early September. This represents approximately 1.5 million owners. While the trend has been similar across all of the investor categories shown in Table 5, the levels have certainly been different, with Fannie / Freddie stock much lower, currently at 1.52%, and Ginnie / Freddie stocks. Much higher portfolio / PLS.
Note that the change in the respective levels of these two is due to the large and ongoing repurchases of delinquent loans of Ginnie Mae’s securities. In the MBA survey, a buyout results in a loan being moved from the Ginnie Mae category to the portfolio investor category and is reported as such.
Under the original wording of the CARES Act, forbearance conditions for federally guaranteed loans were limited to 12 months and required contact with the borrower to be established after six months to continue withholding for a period of six months. the full 12 months. In 2021, the FHFA and HUD extended the maximum forbearance periods to 18 months, given the continuing challenges many homeowners face, even with the economic recovery to date.
Although 18 months is the maximum time allowed, we have seen millions of homeowners come out of forbearance long before that date. To date, forbearance outflows have totaled 9.5% of the average service portfolio: roughly 4.8 million owners. The fastest pace of releases to date was recorded last fall through late September / early October, when many owners hit the 6 month point. Exits were also very rapid at the 3 month and 12 month points.
Policy makers and industry participants agreed in Spring 2020 when it came to the design of the forbearance program, expressing the importance that it be nearly frictionless to allow service agents to operate. ” help as many people as possible quickly. Borrowers simply had to assert a test related to Covid-19. This was quite a change from the heavy documentation process that was developed for loss mitigation from the Great Financial Crisis (GFC).
There was a similar desire to design an effective process for getting out of forbearance. In particular, recent experience with natural disasters has shown the benefits of a streamlined deferral program, which has avoided the payment shock that accompanies shorter-term repayment plans and deferred the renegotiated amount to the end of loan through deferral of loan / partial claim. Additionally, standardized change plans that offered payment relief were also part of a cascade of remedies that service agents could offer borrowers.
Last year, policymakers and other stakeholders feared borrowers would be discouraged from abstaining for fear of having to make large lump sum payments at the end of the term. Perhaps surprisingly, the data shows a different story.
First, many forbearers continued to make their payments. Many explained this as borrowers wanting the reassurance and reassurance that forbearance could provide, while still keeping their options open regarding potential refinancing or home buying opportunities while keeping their payment history clean. . In fact, as shown in Table 6, over 22% of forbearance exits were from borrowers who were up to date. And nearly 13% have chosen to pay a lump sum reinstatement compensation to regularize their accounts.
Over 7% of borrowers coming out of forbearance repaid their loans, either by refinancing or by selling a house. Clearly, the hot housing market, with bidding wars amid low inventory levels, has allowed some struggling homeowners to sell quickly if necessary.
At the end of August, more than 28% of exits concerned deferral plans or partial complaints. As noted, the ability to move the waived amount until the end of the loan – not due until the loan is refinanced, the house is sold, or the loan matures – provides leeway to homeowners who are able to make their upfront payment, but No more.
Regarding the other categories in Exhibit 6, over 11% of borrowers opted for a modification. 16% cancellations with no loss mitigation identified in the week the trip was captured. In our conversations with service providers, these borrowers were most likely in the process of finalizing a change or still needed to be contacted to communicate training options. To date, only 0.65% of exits have concerned other resolutions, which would include short selling and acts in lieu.
Will the abstention exit experience so far be a good predictor of what’s to come? In the past year, a smaller share of exits are reported as ongoing or reinstatements, while a larger share are postponements / complaints and partial changes. I expect this trend to continue as fall approaches, as borrowers in the strongest financial position are likely already out, leaving borrowers who will need even more assistance in the future. abstention pool.
The months of September and October will be very busy for duty officers, as many of those abstaining are nearing the end of their terms. While millions of homeowners have been helped so far, it will be essential that repairers continue to provide support to ensure their customers step out towards a lasting resolution. I hope this forbearance program, which has been quite successful so far, ends well.