Q2 Update: Delinquencies, Foreclosures and REO

REO: lender Real Estate Owned

In 2021, I pointed out that with the end of the foreclosure moratoriums, combined with the expiration of a large number of forbearance plans, we would see an increase in REOs in late 2022 and into 2023. And there was a slight increase.

However, I also argued this would NOT lead to a surge in foreclosures and significantly impact house prices (as happened following the housing bubble) since lending has been solid and most homeowners have substantial equity in their homes.

Last week, CoreLogic reported on homeowner equity: CoreLogic: Home Equity Increases From Winter to Spring, Reducing Underwater Properties in Q2

• Only 2% of homeowners with a mortgage were in negative equity as of the second quarter, roughly the same rate recorded over the past two years. The number of underwater U.S. homes peaked at nearly 26% in 2009.

• U.S. homeowners with a mortgage saw year-over-year equity losses of $8,300 in the second quarter of 2023, but quarterly gains added almost $13,900; the average U.S. homeowner now has about $290,000 in equity.

And on mortgage rates, here is some data from the FHFA’s National Mortgage Database showing the distribution of interest rates on closed-end, fixed-rate 1-4 family mortgages outstanding at the end of each quarter since Q1 2013 through Q1 2023 (Q2 2023 data will be released in a few weeks).

This shows the surge in the percent of loans under 3%, and also under 4%, starting in early 2020 as mortgage rates declined sharply during the pandemic. Currently 23.3% of loans are under 3%, 61.3% are under 4%, and 81.2% are under 5%.

With substantial equity, and low mortgage rates (mostly at a fixed rates), few homeowners will have financial difficulties.

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 2023 …