Will 2022 Be The Year Of The Foreclosure?

The foreclosure moratorium has been lifted. There are also eight million borrowers in the US who enrolled in loan forbearance plans that allowed them to quit making mortgage payments for quite a long time. Most of these borrowers have run out of time or will run out soon. Will 2022 be the year of the foreclosure?

When the COVID pandemic arrived early in the 2nd quarter of 2020, a flood of self-proclaimed experts in real estate came forward and warned about a surge of foreclosures that would hit the market in 2020 and 2021. This did not happen.

The President declared a National Emergency and we saw a moratorium on foreclosures and evictions and the implementation of a broad forbearance program that was open to nearly everybody. This put delinquent loans into a time warp, but today most of them have concluded their programs.

In today's report, we seek the answer to whether or not 2022 will be the year of the foreclosure, as the federal moratorium has been lifted, and we need to evaluate the pipeline of delinquencies to prepare for a potential wave of distressed sellers hitting the market.

More importantly, we'll unwrap a key report that exposes the health of the pipeline of mortgage loans in America, certainly critical data for anybody with the intention of forecasting future foreclosure activity.

New Wave Of Foreclosures?

The majority of information in today's report comes from the Black Knight Mortgage Monitor Report With January 2022 Data. If this is an organization that you are unfamiliar with, I encourage you to add them to your favorite data source list.

Overview Of US Mortgage Market

An overview of the US mortgage market reveals mostly positive trends.

The mortgage delinquency rate fell again and at 3.30%, delinquencies have nearly returned to pre-pandemic levels.

Foreclosure starts are up a whopping 7-fold, but this is not as bad as it first appears. Remember, most mortgage companies either voluntarily or through the moratorium did not pursue foreclosures since the start of the pandemic, so the fact that filings exploded in the first month after moratorium cessation is no big surprise.

Roughly one-half of the starts in January were on loans that were already delinquent prior to the pandemic, thus there was a huge backlog of very long-term delinquencies. Despite the 7-fold increase, starts activity remains 20% lower than pre-pandemic levels!

Prepayment activity hit a two-year low, which is disturbing in that refinanced loans have been a top solution for delinquent borrowers. The fact that mortgage interest rates grew significantly in January is very likely the reason we saw fewer prepayments (which are often funded through refinancing).

National Delinquency Rate On First-Lien Mortgages

This graph plots the national delinquency rate on first-lien mortgages, and there are three important takeaways to observe.

In the graph above, the dark line plots the quarterly delinquency rate, the light-green line plots the average recorded from 2000 through 2005, and the gray line plots the record-low delinquency rate recorded just prior to the pandemic. Here's what we know:

1. The peak of the delinquency rate during the beginning of the pandemic was far lower than the peak in 2009, meaning that even though things were difficult, the impact on the mortgage market in the pandemic was far lower than it was during the housing market recovery after the Great Recession.
2. The current delinquency rate is far lower than the "normal" rate from 2000-2005, suggesting a very healthy rebound has occurred.
3. Today's overall rate is approaching a new all-time low!

These three points support the fact that the current housing market is very healthy, so we can narrow our foreclosures concern to the borrowers that already have delinquencies or are finishing out their remaining months of forbearance.

Current Delinquencies By Severity

This next graph segments mortgage delinquencies by severity.

Overall, the trends are very positive, with the worst delinquencies showing huge declines and only new delinquencies showing gains. Again, with foreclosure moratoriums lifted in January, it's not a big surprise to find loans 30-days delinquent on the rise.

The biggest takeaway from this information is that the total number of delinquencies has been cut in half since the start of the pandemic less than two years ago and we're almost back to pre-pandemic levels (yellow line). Serious delinquencies (those that have been delinquent for more than 90 days) declined 9% in January, but remain at double the pre-pandemic level.

Currently, there are 859K seriously delinquent mortgages, nearly half a million more than there were prior to the pandemic. It is this group specifically that contains the bulk of the potential homes that could reach the market this year in foreclosure sales.

Foreclosure Starts Versus Foreclosure Sales

The next graph serves to show the outcome of new foreclosure starts. Specifically, how many new starts resulted in actual foreclosure sales?

Though we've already addressed it, the jump in January starts really stands out in this graph. Despite a more than 7x increase, January foreclosure starts remained more than 20% below pre-pandemic levels.

Equity In The Housing Market

This next graph was not part of the Black Knight report, but it reveals critical information that explains so much of the positivity in the mortgage market when compared to what was observed in 2009.

The graph above plots both equity and debt in the housing market and all we need to do is a "now versus then" study to see why the post-COVID recovery is so different than the housing market recovery more than ten years ago.

From 2006 through 2014, there was no equity in the housing market. Simply put, Americans owed more on their homes than the homes were worth. If a homeowner became delinquent, there was no solution that made lenders whole again. Foreclosures resulted in losses to the borrower and to the lenders.

Look at how that has reversed today. There is equity again in the housing market, and more so than at any time in the past! For the majority of borrowers who become delinquent today, the remedy does not have to be a foreclosure sale. Instead, delinquent borrowers can sell their homes on the open market, repay their debt, and many will walk away with equity!

January Foreclosure Starts

This next graph compares the January foreclosure starts for the past 22 years.

This graph looks at total foreclosure starts in each January going back to 2000 and segments the results between first-time foreclosure starts and repeat foreclosure starts. The percentage of repeat starts is shown in gray and plotted on the right vertical axis.

New starts were split nearly evenly between borrowers who were already delinquent prior to the pandemic and those who became past due more recently. Greater than sixty percent of new foreclosures were first-timers, the highest level in more than ten years.

Foreclosure sales were up 14% in January when compared to December, yet they were roughly 70% lower than pre-pandemic levels. Finally, other than last year when the moratorium was in place, January starts this year were the lowest on record!

Foreclosure Starts By State

The following graphic reveals how each state is faring in new foreclosure starts. Those shaded in blue are showing fewer starts than 2020 levels, while those shaded in green have more starts than 2020 levels.

The majority of states are improving, though some in the Midwest saw an increase in foreclosure starts. States in the Northeast are showing very strong results (for example, New York was 81% lower than its pre-pandemic level while Washington D.C. was 91% lower than its pre-pandemic level! Florida has improved well too, down 21% from its pre-pandemic level.

Serious Delinquencies - Status Check

Foreclosure protections among the most serious delinquencies are shifting since the moratoriums have been lifted and forbearance plans expire.

This graph plots the percentage of serious delinquencies into four different sub-status categories. Basically, it tells us about the most troublesome loans are at this time.

The good news is that the share of serious delinquencies in active forbearance plans has decreased from more than 80% in the summer of 2020 to about 40% in January. The bad news is that many shifted to active loss mitigation which now represents about 40% of the serious delinquencies.

Currently, more than 80% of serious delinquencies continue to be "protected" against a foreclosure start due to bankruptcy, loss mitigation, or active forbearance plans.

It will be this group that represents the big "foreclosure wave" threat that was promised by many self-appointed experts on YouTube in the past two years. But rather than the several million homes they warned us about, the grand total looks to be closer to half a million homes. With the housing market short more than five million homes today, all of these homes will be consumed rapidly, and most done prior to a foreclosure sale.

Active Forbearance Plans

This next graph provides information about the number of loans on active forbearance plans. As a reminder, a forbearance plan is an agreement between borrower and lender for a period of time that allows the non-payment (or partial payment) of the loan to help the borrower retain the home.

The first thing that jumps out at me when I look at this graph is that there were nearly five million borrowers who went into forbearance at one point early in the pandemic. This action caused many self-proclaimed real estate experts to come out and call for a foreclosure wave that would cause massive home price declines in 2021 and 2022. Obviously, that did not happen.

Today, there are fewer than eight hundred thousand borrowers on active forbearance plans, a decline of roughly four million borrowers, representing about 1.5% of all loans. The number of borrowers who left forbearance plans in January was 39K (roughly a 5% decline when compared to December).

Forbearance Plan Expiration Dates

This next graph provides information about the termination dates of active forbearance plans. 

This graph shows that anywhere from 30K to 90K borrowers will complete their forbearance agreements in any given month this year, thus giving mortgage servicers manageable volumes (compared to the millions they processed in the past twelve months).

As previously discussed, with plenty of equity in the housing market, coupled with rising equity levels each month, the outcome for the majority of these loans should be repayment in full plus equity for the homeowners. The forbearance plans look to have been a win-win for borrowers and mortgage holders.

Forbearance Plan Starts

This graph plots the number of starts (blue line) and restarts (green line) of new loan forbearance plans since the beginning of the pandemic through mid-February.

On February 18, 2022, the Continuation of the National Emergency Concerning the Coronavirus Disease 2019 (COVID-19) Pandemic was signed by President Biden, allowing certain borrowers to start or renew forbearance agreements.

This means that borrowers who have not exhausted their allotment of time on Forbearance can continue to enter forbearance, so this is a graph that is worth watching to see the impact on the total number of loans in forbearance change over time. It could also mark a secondary source of foreclosure sales, though not very likely in 2022.

Current Status Of Pandemic Related Forbearances

Roughly eight million borrowers have been in forbearance at some point since the pandemic began and this graph segments them into current status categories.

When the first national emergency forbearance program was launched, it caused many to worry about a resulting flood of new foreclosures. Instead, here is what has happened:

Roughly 90% of borrowers have already exited their plans, with more than 50% returning to making mortgage payments and another 27% have paid off their loans in full.

Currently, there are about 450K borrowers still working through options with their lenders.

Loans In Active Foreclosure Post-Forbearance

This graph looks at loans in active foreclosures post-forbearance, broken down to those delinquent prior to COVID versus those delinquent after COVID.

Currently, roughly 70K borrowers are in post-forbearance foreclosure (which is up about 19% from the same time last month). It's important to note that 70% of post-forbearance foreclosures were already delinquent prior to the pandemic.

Current Status Of Loans That Have Left Pandemic Forbearance Plans

The next graph shows the current status of the loans that have left forbearance plans.

Black Knight reports that nearly 1.4M borrowers ended forbearance plans since the beginning of October of last year. Less than a tenth of them have since become delinquent and entered loss mitigation efforts with their loan servicers.

This group of borrowers represents the strongest potential for foreclosure listings to enter the real estate market (this is a subset of the 500K already identified for this potential). Even so (as stated prior), many will be able to avoid foreclosure by selling their homes on the open market.

Black Knight Home Price Index Jibes With Others

The following graph is the Black Knight Home Price Index which I've included demonstrating that Black Knight's data on home prices parallels my findings from several other data sources.

This graph plots the 1-month percentage change in home prices in blue (recorded on the right vertical axis) as well as the annual home price growth rate in green (recorded on the left vertical axis). Just as our previous reports have shown, home prices are soaring with the current rate approaching 20% per year!

National Payment To Income Ratio

One way to measure home affordability over time is to examine the ratio between monthly mortgage payments and the income of borrowers.

This graph plots the National Payment-to-Income Ratio. It is measured as the share of median income needed to make the monthly principal and interest payment on the purchase of the average-priced home using a 20% down, 30-year fixed-rate mortgage at the prevailing interest rate.

Rising mortgage interest rates coupled with rising home prices has put significant pressure on home affordability already in 2022. Black Knight reveals that it now requires 27.5% of the median household income to purchase the average priced home, which is well above the long-term home affordability benchmark of 25%, though still well below the high of 34.1% established during the pre-Great Recession housing bubble.

It's important to note that this graph was produced in February and we have seen mortgage interest rates spike higher in recent days!

Will 2022 Be The Year Of The Foreclosure?

Before this year concludes, the US housing market will sell more foreclosed homes than it did in 2021. Of course, there was a foreclosure moratorium in 2021, so this isn't a big shock to the market.

One needs to remember that foreclosure sales occur all the time, so the fact that we'll see them this year is not necessarily newsworthy. The big question is really how much of a (negative) impact on the market will these additional foreclosure sales have?

As with all market-based questions, we need to look for the answer in the supply and demand dynamic. Will new foreclosure sales negatively impact supply (oversupply the market)? To answer this, let's examine the relative supply of homes for sale today.

This graph lots the number of homes for sale each month in the US (blue bars measured on the left vertical axis) and then uses current sales data to compute the relative supply of homes for sale (the months of supply of homes, shown in red and reported on the right vertical axis). The gray-dashed line shows the one-year average of the relative supply of homes.

Both the real supply and the relative supply of homes are at all-time lows. More homes are badly needed right now, so the addition of extra foreclosures (though sad for the families that lost them), could be a welcome change. So how do we determine how much is too much?

I am going to assume that home sales cool off a good bit due to rising prices and rising mortgage interest rates, and I’ll also assume new construction in 2022 will be lower-than-needed due to supply chain issues. Thus I suspect the US existing homes market supply side would hit equilibrium somewhere in the 1.5M to 2.5M homes level.

Remember, foreclosures won't all happen immediately and simultaneously, rather they will stream into the market as they are executed. Nevertheless, let's create a worst-case-scenario and evaluate the full mass of 175K to 500K foreclosures entering the market simultaneously and immediately.

The highest we saw the supply reach in 2021 was 1.3M homes, so assuming the worse, that all 500K homes in our high-risk group entered the market today, we are looking at a total of 1.4M homes for sale in April.

Believe it or not, the highest anticipated number of foreclosures is not enough homes to get to the bottom of our expected balanced market, meaning in a worst-case scenario, 100% of the delinquencies that could hit the market in 2022 cannot end the sellers' market! 2022 will NOT be the year of the foreclosure!