Q3 Update: Delinquencies, Foreclosures and REO

REO: lender Real Estate Owned

Last year, 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. However, 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.

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 Q3 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, foreclosure houses) increased from $784 million in Q2 2022 to $818 million in Q3 2022. This is increasing, but still very low.

Fannie Mae reported the number of REO increased to 8,353 at the end of Q3 2022 compared to 6,554 at the end of Q3 2021. Here is a graph of Fannie Real Estate Owned (REO). REO inventory increased in Q3 2022, and inventory is up 27% year-over-year.

This shows that REOs are increasing, 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 Q3 2022.

Note The percent of loans in the foreclosure process increased in Q3 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 second-quarter 2022, the seasonally adjusted mortgage delinquency rate decreased for all loans outstanding to 3.45 percent, the lowest level in the history of the survey dating back to 1979. By stage, the 30-day delinquency rate remained unchanged at 1.66 percent, the 60-day delinquency rate increased 4 basis points to 0.53 percent, and the 90-day delinquency bucket decreased 22 basis points to 1.27 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 0.67% in October down from 1.46% in October 2021.

Freddie Mac reported that the Single-Family serious delinquency rate in October was 0.66%, down year-over-year from 1.32% in October 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 from the record lows last year, but foreclosure starts are still 55% below pre-pandemic levels. From Black Knight: Black Knight: 8% of 2022 Mortgaged Home Purchases Now Underwater; FHA Loans See Early-Payment Defaults Rise

There are some homeowners at risk. Yesterday Black Knight noted:

Risk among earlier purchases is essentially nonexistent given the large equity cushions these mortgage holders are sitting on. More recent homebuyers don’t fare as well. Of the 450K underwater borrowers at the end of Q3, the mortgages of nearly 60% had been originated in the first nine months of 2022 – and these were overwhelmingly purchase loans. All in, 5% of purchase mortgages originated thus far in 2022 are now marginally underwater, with another 20% in low equity positions

The bottom line is there will be an increase in foreclosures over the next year (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.