Delinquencies, Foreclosures and REO

REO: Real Estate Owned

Last year, I pointed out that the foreclosure moratorium, combined with the expiration of a large number of forbearance plans, would NOT lead to a surge in foreclosures and impact house prices (as happened following the housing bubble). In September 2021, I wrote:

With house prices up sharply year-over-year - up 16.6% nationally in May according to Case-Shiller - very few borrowers will have negative equity, and most seriously delinquent borrowers will be able to sell their house, as a last resort, and avoid foreclosure.

So, although foreclosures will increase from the record low levels, it will take some time (probably in 2022), and there will not be a huge wave of foreclosures like following the housing bubble.

Some simple definitions (for housing):

Forbearance is the act of refraining from enforcing mortgage debt.

Delinquency is the failure to make mortgage payments on a timely basis.

Foreclosure is when the mortgage lender takes possession of the property after the mortgagor failed to make their payments. “In foreclosure” is the process of foreclosure.

REO (Real Estate Owned) is the amount of real estate owned by lenders.

Here is some data on REOs through Q4 2021 …

We will probably see an increase in REOs in 2022.

This graph shows the nominal dollar value of Residential REO for FDIC insured institutions. Note: The FDIC reports the dollar value and not the total number of REOs.

The dollar value of 1-4 family residential Real Estate Owned (REOs, foreclosed houses) declined from $1.11 billion in Q4 2020 to $0.78 billion in Q4 2021. This is the lowest level of REOs in many years. (Probably declined sharply due to foreclosure moratoriums, forbearance programs and house price increases).

And some data from Fannie and Freddie. Freddie Mac reported the number of REO declined to 1,615 at the end of Q4 2021 compared to 1,766 at the end of Q4 2020. Fannie Mae reported the number of REO declined to 7,166 at the end of Q4 2021 compared to 7,973 at the end of Q4 2020.

Here is a graph of Fannie and Freddie Real Estate Owned (REO). REO inventory decreased in Q4 2021, and combined inventory is down 10% year-over-year.

Note that Fannie and Freddie REO increased from 8,001 in Q3 2021 to 8,871 in Q4 2021. This is well below a normal level of REOs for Fannie and Freddie, and REO levels will increase in 2022.

Here is some data on delinquencies …

It is important to note that loans in forbearance are counted as delinquent in the various surveys, but not reported to the credit agencies.

Here is a graph from the MBA’s National Delinquency Survey through Q4 2021.

Note that the percent of loans in the foreclosure process was at the lowest level since 1981. (There was a foreclosure moratorium that ended on July 31, 2021). Short-term delinquencies (30 and 60 days) have increased recently but are still at a low level. Loans in forbearance are mostly in the 90-day bucket at this point, and that is declining.

Both Fannie and Freddie release serious delinquency (90+ days) data monthly. Fannie Mae reported that the Single-Family Serious Delinquency decreased to 1.17% in January, from 1.25% in December. And Freddie Mac reported that the Single-Family serious delinquency rate in January was 1.06%, down from 1.12% in December.

This graph shows the recent decline in serious delinquencies:

The pandemic related increase in serious delinquencies was very different from the increase in delinquencies following the housing bubble.   Lending standards have been fairly solid over the last decade, and most of these homeowners have equity in their homes - and they will be able to restructure their loans once they are employed.

And on foreclosures …

Last month, Black Knight reported that foreclosure starts “surged”, but were still lower than normal. From Black Knight: Foreclosure Starts Surge Sevenfold in January, Hitting Highest Level in Two Years; Though Volumes Rising, Still 20% Below Pre-Pandemic Levels

• Foreclosure starts rose sharply in January as borrower protections in place throughout the economic recovery begin to roll off, with 32,900 loans referred to foreclosure in the month

• While up significantly from December’s 4,100, January’s start volume was still more than 20% below the 42,800 in January 2020, prior to the onset of the COVID-19 pandemic

• Roughly half of the month’s starts were among borrowers who were already delinquent prior to the economic impacts of COVID-19, and half from borrowers who became past due in March 2020 or later

• In turn, the national foreclosure rate rose to its highest level since May 2021 (0.28%) – still nearly 40% below its pre-pandemic level, with foreclosure sales (completions) 70% below January 2020 levels

The bottom line is there will be an increase in foreclosures in 2022 (from record low levels), but it will not be a huge wave of foreclosures.