Behind the Headlines: Unpacking the Data On Foreclosures And Mortgage Delinquencies

Are you curious about what's really going on with foreclosures and loans in forbearance? Worried about the next housing crash?

With sensational headlines about foreclosures and interest rates dominating the news cycle, it can be tough to get an accurate picture of the state of the housing industry. That's why I turned to the Black Knight Mortgage Monitor, the gold standard for analyzing the US mortgage market's strength.

In this comprehensive report, you'll discover the latest trends in home prices, loans in forbearance, and yes – even the potential for a foreclosure explosion. So if you're ready to cut through the noise and get a clear understanding of the mortgage market, keep reading – because the insights in this report are not to be missed.

Black Knight Mortgage Report Overview

In February, serious delinquencies improved nationally, with a 17K decrease and 45 states reporting reduced volumes.

In February, a 2% increase in the delinquency rate was caused by a rise in early-stage delinquencies, while serious delinquencies continued to decline. Foreclosure starts fell to 29K, ending a four-month upward trend. 5.1% of serious delinquencies began foreclosure actions. Prepayment activity increased slightly with purchases. The single-month mortality rate of .35% remains close to record lows.

National Delinquency Rate

The national delinquency rate refers to the percentage of mortgage loans that are past due or in default. It measures the overall health of the mortgage market and is often used as an indicator of potential economic problems, as rising delinquency rates can signal a weakening economy or housing market.

The baseline for this graph is plotted in light green, and it shows the average delinquency rate for the years from 2000 through 2005. The dark green line plots the actual delinquency rate for the past twenty-one years, while the gray line identifies the record low. Currently, US mortgage delinquencies are just above an all-time low.

Mortgage Delinquency By Severity

Mortgage delinquency by severity refers to categorizing delinquent mortgage loans based on the number of payments the borrower has missed. Typically, mortgage delinquency by severity is divided into three categories:

1. 30-day delinquency: The borrower is one month behind on their mortgage payment.

2. 60-day delinquency: The borrower is two months behind on their mortgage payment.

3. 90-day delinquency: When the borrower is three months or more behind on their mortgage payment.

Lenders and servicers use mortgage delinquency by severity to track and manage delinquent loans. This information can help them determine the appropriate actions, such as offering payment assistance or initiating foreclosure proceedings. We can use mortgage delinquency by severity as an indicator of the health of the mortgage market, as higher delinquency rates can signal potential economic problems.

The national delinquency rate for mortgage loans increased by seven basis points to 3.45% in February. However, compared to the same month in the previous year, the delinquency rate decreased by 13%. The rise in delinquencies in February was mainly due to a 7.1% increase in borrowers who were 30 days past due. Although there was a decline of 46,000 delinquent borrowers in January, the increase in February left a net increase of 19,000 delinquent borrowers over the two-month period.

On the other hand, delinquencies for borrowers who were 60 days and 90 days past due decreased by 4% and 3%, respectively. Despite improving late-stage delinquencies, the overall delinquency rate worsened in 36 states and the District of Columbia.

Historically, March is the month that experiences the most significant monthly improvement in mortgage delinquency rates, with rates falling by around 10% in an average year. However, this year, potentially smaller tax refunds and new economic pressures may reduce the positive impact of tax refunds on delinquent payments.

Early Payment Default Date For FHA Mortgages By Vintage

Early Payment Default (EPD) is when a borrower with an FHA-insured mortgage loan becomes delinquent on their payments within the first 90 days of the loan origination.

The EPD rate is an important metric for lenders and investors in FHA mortgages because it can indicate potential issues with the loan origination process or underwriting standards. High EPD rates may suggest that the lender is originating loans to borrowers who may have difficulty making timely payments, which could result in losses for the lender and impact the overall health of the FHA insurance fund. Therefore, monitoring EPD rates is important for identifying potential areas of weakness in the origination process and implementing risk management strategies.

Newer FHA loans from 2022 have higher early payment default (EPD) rates than those from 2009 to 2019. 2.3% became delinquent within three months, and 9.3% within a year. The 2019 vintage had more 12-month delinquencies, and 2020 showed higher three-month delinquencies due to the pandemic. The 2021 and 2022 vintage EPD rates remain below those of 2005-2008 vintages, where delinquencies six months after origination ranged from 7% to 11%. This trend is worth monitoring to see how much friction will be created from cooling sales and higher mortgage interest rates.

Fed Funds Rate Outlook

The Fed Funds outlook refers to the anticipated direction and level of the Federal Reserve's target interest rate for overnight interbank lending. It is influenced by various economic indicators, such as inflation, employment, and GDP growth, as well as by the Federal Open Market Committee's (FOMC) monetary policy decisions. Investors closely monitor the Fed Funds outlook, economists, and financial institutions, as changes in the target rate can affect interest rates, economic activity, and financial market conditions.

In February, the Fed Funds rate outlook changed frequently, starting low but increasing due to strong economic news.

The banking crisis raised uncertainty around potential rate increases by the FOMC, affecting the Treasury rate and spread. Following the collapse of Signature Bank and Silicon Valley Bank, a 25 bps Fed Funds increase in March, and shifting FOMC forward guidance, the market now expects possible rate cuts later in the year. 

To say that chaos and confusion are today's standard is an understatement. We have more information that should clarify where mortgage interest rates are headed.

Rate-Lock Volume By Purpose

The mortgage industry tracks rate-lock volume by purpose to gain insight into the demand and activity levels for different types of loans. Rate lock volume is an important indicator of the number of loans that are in the pipeline and are likely to close, as borrowers typically lock in their interest rates when they are in the process of obtaining a mortgage.

Another title for this graph could be "Don't Forget To Hug Your Mortgage Loan Professional." Just look at the decline in mortgage originations from just two years ago. The decline of home sales always hits mortgage professionals hard, but they are usually able to offset the decline in purchase originations with refinances. Note how the non-purchase activity stopped completely about a year ago.

Payment-To-Income Ratio vs. 30-Year Rates

The payment-to-income ratio is an important metric in real estate sales because it shows the percentage of a borrower's income that goes toward their mortgage payments. This ratio helps lenders determine borrowers' ability to make mortgage payments and avoid default. By tracking payment-to-income ratios across the housing market, we can gain insights into the overall affordability of homes and the potential for a housing market downturn.

The median-priced home in the US now requires 33.2% of the median household income, similar to the 2006 market peak and much higher than the average of roughly 25%. This means that home prices are currently about 25% higher than what underlying incomes typically support at today's interest rates.

One way for affordability to return to long-run averages would take a 10% decrease in prices, a 5% increase in income, and a return to 5.25% interest rates on a 30-year mortgage. As some of the following material will show, holding out for a significant decline in home prices would not be prudent.

Monthly P&I Payment To Purchase Average Priced Home

Home affordability is below long-run averages in 49 of the 50 largest markets except Cleveland. 35% of markets require ten percentage points more than the median local market income to afford the median home, and the problem is far worse in some areas.

Los Angeles (+28pp), San Diego (+21pp), Miami (+21pp), San Jose (+19pp), and San Francisco (+17pp) are the least affordable markets, and except for Miami, all have seen significant price declines due to rising interest rates.

If you did not catch the point, home affordability is tanking the hardest in California. When I produce videos for YouTube explaining US housing market conditions, invariably, Californians claim the bottom is falling out of the market. Unfortunately for them, it is.

I believe home affordability is among the most important topics to consider as we head into the next election cycle. My greatest concern is that we'll see consolidation in housing, and all but the wealthiest among us will be renting homes from a new "Amazon of housing."

Sales, Active Listings, And Months Of Inventory

February's home sales activity increased, suggesting we've hit a market bottom for home sales.

Home sales were 18% below their pre-pandemic average in 2019, due to affordability pressures, and the number of homes available for sale decreased for the fifth consecutive month on a seasonally adjusted basis, reaching the lowest level since May 2020.

New Real Estate Listings

New listings were 27% below pre-pandemic levels, and active inventory levels are now 47% below pre-pandemic levels.

In February, 91 of the top 100 and 47 of the top 50 saw a decline in inventory. These low inventory levels are protecting home values. Unlike in 2006, when home sales declined, we are not seeing builder production send the market into a supply excess.

We have been under-building in the US for more than ten years, and the void in the availability of homes is the primary reason home prices are so high. As always in real estate, the supply and demand for homes determines the direction of home prices.

While higher mortgage interest rates have slashed the demand for homes, the declining supply has kept the market balance in favor of home sellers, meaning that in most areas over the long haul, we anticipate home prices rising.

Black Knight Home Price Index

Home prices rose in February on both a non-adjusted and seasonally adjusted basis, breaking a streak of seven monthly declines.

In January and early February, home prices slightly increased due to a modest easing of affordability and tightening inventory levels.

Adjusted home prices were up 0.16% for the month, the strongest gain since May 2022, while non-adjusted prices were up 0.68%.

However, the percentage change in home prices over the past twelve months fell to 1.94%, the first time it has been below 2% since early 2012. Home prices are expected to fall into negative territory by April (April data will be released in early June), but may return above 0% before year-end if inventory challenges persist and interest rates ease.

Overall, home prices nationally are now down 2.6% from their 2022 peak, slightly better than January's 2.7%.

Change In Home Price Index From 2022 Peak

Home prices increased in 78% of the major housing markets across the country in February, a significant contrast from November when prices only rose in 4% of the markets. Despite the change in February, adjusted home prices are generally lower than their 2022 peaks, but the gaps between the prices and peaks narrowed in most areas.

This graph plots the change in the Home Price Index from the very top of the market through February. Can you spot a general trend?

Prices in cities such as San Jose, San Francisco, Austin, Seattle, and Phoenix have experienced the steepest pullbacks, with declines of over 10%. Additionally, Las Vegas, Sacramento, Salt Lake City, San Diego, and Los Angeles have all experienced declines between 7.5% and 10% from last year's peaks.

However, eight markets, including Louisville, Kansas City, Virginia Beach, Oklahoma City, Philadelphia, Hartford, Cincinnati, and Miami, have returned to their peak levels.

There seems to be an East-West divide in the US housing market, though it might be more accurately described as a California-The Rest Of The US divide.

According to CalMatters, In 2021, it was big news — the “California exodus.” Now, it just looks like the new trend: California's population is still shrinking. According to the latest population estimates from the U.S. Census Bureau, California's total population declined by more than 500,000 between April 2020 and July 2022.

HPI - Markets With Largest Declines

The following tables reiterate the East vs. West divide in the US housing market.

In February, the number of markets with year-over-year price declines increased to 15 from 13 in January. Minneapolis (-0.3%) and Raleigh (-0.6%) have marginally declined from last year.

Among the markets with the steepest declines, San Jose (-13%), San Francisco (-11.9%), and Seattle (-10%) had the largest year-over-year declines.

Hartford, Kansas City, Virginia Beach, Cincinnati, and Philadelphia are rising up the ranks with relatively strong affordability and low inventory levels. In contrast, western markets, pandemic boom towns, and some Florida markets are cooling down.

Homeowner Equity On Mortgaged Properties

Home prices have softened, resulting in a contraction in mortgage holder equity, but it rebounded somewhat in February.

Total mortgage holder equity is down $2T (12%) from its 2022 peak, and the tappable equity (the share available to lend/borrow against while still maintaining a 20% equity cushion) has dipped by $1.6T (15%).

Despite the decline, $9.3T in equity remained available to tap as of the end of February, which is still up 56% ($3.4T) over the past three years.

To put those trillions of dollars into perspective, the average mortgage holder has $178K in tappable equity, down from more than $210K early last year but still $61K (54%) above the market average three years ago. Overall, homeowners still have strong equity cushions, despite recent declines.

This kind of information on homeowner equity explains why we SHOULD NOT expect elevated rates of foreclosures any time soon. People who get behind on their mortgage payments, for the most part, can sell their homes, pay off their debt, and walk away with cash.

Distribution Of Equity Withdrawals

It is prudent to track the distribution of equity withdrawals in the US mortgage market because it can provide insight into consumer behavior and economic trends. When homeowners withdraw equity from their homes, they often use it for consumption or investment purposes, which can impact the overall economy.

In the fourth quarter of 2022, more than 60% of borrowers who added a second lien to withdraw equity had taken out their first lien in 2020 or 2021. This makes sense because they locked in near-record-low first lien rates and have seen considerable home price gains since taking out their mortgages.

When I look at this graph, it is apparent that a lot of cash entered the economy in 2020 and 2021. Coupling that with the economic stimulus provided for COVID relief makes me wonder if our economy might be due for a hard downturn, as it's not likely we'll see as many homeowners tapping into their home equity with today's higher mortgage interest rates.

Active Forbearance Plans

The forbearance actions initiated during the COVID-19 pandemic provided critical relief to millions of borrowers struggling to make payments due to job losses, reduced income, and other pandemic-related challenges. The forbearance programs allowed borrowers to temporarily pause or reduce their monthly payments without penalty, helping them avoid default and foreclosure.

As of now, it is difficult to provide a final verdict on the forbearance actions as the programs are ongoing, and their long-term impact on borrowers and the economy remains to be seen. However, initial data and reports suggest that the forbearance programs have successfully prevented widespread default and foreclosure.

Current Status Of Loans That Have Left COVID-19 Forbearance Plans

When five million borrowers jumped into forbearance plans, we were immediately inundated with reports claiming that the housing market would soon be flooded with foreclosures from people who lost their jobs.

If you look back at what I wrote as the COVID-19 pandemic swept through the US in early 2020, I was confident that the low inventory of homes and the equity in the housing market would protect us from a foreclosure crisis. This graph proves that I was correct.

Only the tiny slivers of black and dark gold represent the "wave of foreclosures" that was supposed to be as many as eight million homes (but has been well below 200,000). There are about 630,000 homes that remain in a delinquent status, but the market has seen equity increase by more than 30% since they were started, so you can bet that many will be able to sell without entering foreclosure.

As always, if it bleeds, it reads, so the articles that promised doom and gloom were widely popular. But wrong.

Stick With The Facts

The housing market is terribly unhealthy, but ill health is due to a lack of homes and the resulting soaring home affordability crisis.

Reports of an impending foreclosure wave were fabricated to generate views and are not based on actual data regarding the strength of the US housing market and mortgage pipeline.

The national delinquency rate remains near a 21+ year low, and there is a historically low supply of homes in the US. It's unlikely that masses of people will lose their homes to foreclosure sales, as the market has gained significant equity over the past three years.

Home prices are relatively stable, and most of the US continues to see home prices rise and homeowner equity grow, with California being an exception. Don't be swayed by hype reports; the facts are in the data we update here weekly.