After a roller coaster two years of volatility, the housing market is settling into a downward drop. But while home sales volume is plummeting and home prices are spiraling, there is one housing factor on the rise — mortgage delinquencies.
The share of delinquent one-to-four unit U.S. mortgaged homes increased to 3.96% in the fourth quarter (Q4) of 2022, according to the Mortgage Bankers Association (MBA). This was still down from 4.65% a year earlier, but up from 3.45% in Q3 2022, the lowest delinquency rate since 1979 when the MBA began tracking the data.
The reversal in delinquencies is attributed to the weakening economy — jobs — and ongoing inflationary pressures — mortgage-backed bonds and 10-year Treasury note rates — according to the MBA. It expects the delinquency rate to continue to rise in 2023 alongside diminished jobs market performance.
One fundamental defect bringing about delinquencies is the permissive spike in pricing by mortgages originated at prices which had no chance of being realized when the pandemic homebuying frenzy ended: a long-term mortgage without a long-term property value to support the principal lent.
California home sales volume broke another decade low in January 2023
Broken down by mortgage type, the delinquency rate increased to:
The same trend is taking place here in California, where 2.0% of mortgaged homes are in some stage of delinquency as of January 2023, up slightly from 1.9% at the end of 2022, according to Black Knight.
While lenders may start the foreclosure process on mortgages 90+ days delinquent, a notice of default (NOD) was issued for just 5.6% of U.S. mortgages 90+ days delinquent in January 2023.
California’s share of delinquent mortgages has crept higher since bottoming at 1.7% in May 2022 — the same month that home prices peaked here in the state.
Underwater homeowners — owing more on their mortgage than their home’s current fair market value (FMV) — are more likely to be delinquent on their mortgages than those in a positive equity position.
Nationally, 5% of mortgages originated in 2022 are underwater as of Q3 2022, and an additional 19% of mortgages originated in 2022 have less than 10% equity. Most of these no- and low-equity mortgages are FHA-insured and VA-guaranteed loans, which have little to no down payment requirements.
A seller typically needs at least 10% equity to be in a position to sell and cover the 5%-6% broker fees as well as pay for any necessary repairs, improvements or other seller concessions demanded in a buyer’s market.
Without at least 10% equity in a property, a traditional sale is not possible, and foreclosure follows when mortgage payments are not paid. As this dynamic snowballs in 2023-2025, a rise in real estate owned (REO) property will occur as the number of bank-owned properties balloons.
Generally, when going into a foreclosure season, mortgage lenders are without staff to properly manage pricing at trustee’s sale or work out payment moratoriums for recently unemployed homeowners. Thus, the lender starts foreclosure and bids on the property for the amount of the debt rather than accept a market price at the auction a 3rd party bidder is willing to pay. The result is the lender becomes the owner, and the property becomes classified as REO inventory.
Real estate agents need to prepare to work with REO properties by:
Ensure your future access to fees by forging relationships with key players in the REO landscape — namely, servicers and lenders. These relationships will set up your business with a steady stream of clients during the leaner years ahead.
MLO recession survival guide part 3: Working with REO property