Q2 Update: Delinquencies, Foreclosures and REO

REO: lender 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 … 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 Q2 2022 …

We will probably see an increase in REOs in late 2022 and into 2023 following the end of the moratoriums.

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, foreclosure houses) decreased slightly from $788 million in Q1 2022 to $784 million in Q2 2022. (Probably declined in 2020 and 2021 due to foreclosure moratoriums, forbearance programs and house price increases).

Fannie Mae reported the number of REO increased to 7,637 at the end of Q2 2022 compared to 6,363 at the end of Q2 2021. Here is a graph of Fannie Real Estate Owned (REO). REO inventory increased in Q2 2022, and inventory is up 20% year-over-year. However, this is still very low - and well below the pre-pandemic levels.

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 Q2 2022.

Note The percent of loans in the foreclosure process increased in Q2 with the end of the foreclosure moratoriums. Loans in forbearance are mostly in the 90-day bucket at this point, and that is declining quickly. From the MBA:

Compared to last quarter, the seasonally adjusted mortgage delinquency rate decreased for all loans outstanding to 3.64 percent, the lowest level in the history of the survey dating back to 1979. By stage, the 30-day delinquency rate increased 7 basis points to 1.66 percent, the 60-day delinquency rate decreased 7 basis points to 0.49 percent, and the 90-day delinquency bucket decreased 47 basis points to 1.49 percent.

emphasis added

Both Fannie and Freddie release serious delinquency (90+ days) data monthly. Fannie Mae reported that the Single-Family Serious Delinquency decreased to 0.76% in July from 0.81% in June. The serious delinquency rate is down from 1.94% in July 2021. 

Freddie Mac reported that the Single-Family serious delinquency rate in July was 0.73%, down from 0.76% June. Freddie's rate is down year-over-year from 1.74% in July 2021.

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 have been able to restructure their loans once they were employed.

And on foreclosures …

Black Knight reported that active foreclosures have increased slightly from the record lows last year, but foreclosure starts declined in July. From Black Knight: Foreclosure Starts Pull Back in July, Holding Well Below Pre-Pandemic Levels, While Early-Stage Delinquencies Edge Slightly Higher

• Foreclosure starts retreated 25% from June for a total of 17.7K starts – some 55% below pre-pandemic levels for the month of July – equating to just 3% of 90+ day past-due loans

• Though still up from record lows that came from widespread moratoriums and forbearance protections last year, the number of loans in active foreclosure declined slightly by 6K in July

The bottom line is there will be an increase in foreclosures late this year and next (from record low levels), but it will not be a huge wave of foreclosures as happened following the housing bubble. The distressed sales during the housing bust led to cascading price declines, and that will not happen this time.