Q4 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. 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.

Last week, CoreLogic reported on homeowner equity: US Annual Home Equity Gains Cool Again in Q4 2022, CoreLogic Reports

The report shows that U.S. homeowners with mortgages (which account for roughly 63% of all properties) saw equity increase by 7.3% year over year, representing a collective gain of $1 trillion, for an average of $14,300 per borrower, since the fourth quarter of 2021.

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 Q4 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 $818 million in Q3 2022 to $829 million in Q4 2022. This is increasing, but still very low.

Fannie Mae reported the number of REOs increased to 8,779 at the end of Q4 2022, up 23% from 7,166 at the end of Q4 2021. Here is a graph of Fannie Real Estate Owned (REO).

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 Q4 2022.

Note The percent of loans in the foreclosure process increased in Q4 with the end of the foreclosure moratoriums. Loans in forbearance are mostly in the 90-day bucket at this point, and that has declined recently (although it increased in Q4). From the MBA:

Compared to last quarter, the seasonally adjusted mortgage delinquency rate increased for all loans outstanding. By stage, the 30-day delinquency rate increased 26 basis points to 1.92 percent, the 60-day delinquency rate increased 13 basis points to 0.66 percent, and the 90-day delinquency bucket increased 11 basis points to 1.38 percent.
...
The delinquency rate includes loans that are at least one payment past due but does not include loans in the process of foreclosure. The percentage of loans in the foreclosure process at the end of the fourth quarter was 0.57 percent, up 1 basis point from the third quarter of 2022 and 15 basis points higher than one year ago.

emphasis added

Both Fannie and Freddie release serious delinquency (90+ days) data monthly. Fannie Mae reported that the Single-Family Serious Delinquency decreased to 0.64% in January from 0.65% in December. The serious delinquency rate is down from 1.17% in January 2022.

Freddie Mac reported that the Single-Family serious delinquency rate in January was 0.66%, unchanged from 0.66% December. Freddie's rate is down year-over-year from 1.06% in January 2022.

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 37% below pre-pandemic levels. From Black Knight: Black Knight: Sellers Retreat From the Market, Increasing Inventory Shortage and Buoying Home Prices; Affordability Takes Step Back on Rising Interest Rates

According to Black Knight, there were 32,500 foreclosure starts in January 2023, up from 28,200 in December 2022, and up from the record low of 22,900 last July.

The bottom line is there will be an increase in foreclosures in 2023 (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.