Foreclosure Rates and Mortgage Delinquencies

Is now a good time to refinance your mortgage? If you had asked that question in October the answer would have probably been “absolutely not.” Mortgage rates were around 8% at the time.

But what a difference two months makes. Rates have drifted lower over the last couple of weeks. After the Federal Reserve declined to raise rates at its December meeting and signaled rate cuts next year, they moved even lower.

Even before the Fed action, current homeowners with higher mortgage rates were racing to refinance, to shave a little off their monthly house payment. The Mortgage Bankers Association (MBA) reports the Market Composite Index, a measure of mortgage loan application volume, increased 7.4% this week from one week earlier. 

On an unadjusted basis, the Index increased by 6% compared with the previous week. The Refinance Index increased 19% from the previous week and was 27% higher than the same week one year ago.

The refinance share of mortgage activity increased to 39.2% of total applications from 34.7% the previous week. The adjustable-rate mortgage (ARM) share of activity decreased to 6.3 percent of total applications.

Things should get even better next year

MBA Chief Economist Mike Fratantoni said the Fed’s pivot at the December meeting should make it even more advantageous to refinance.

“Additional rate hikes no longer appear to be part of the conversation,” he said. “It is all about the pace of cuts from here. This is good news for the housing and mortgage markets. We expect that this path for monetary policy should support further declines in mortgage rates, just in time for the spring housing market. We are forecasting modest growth in new and existing home sales in 2024, supporting growth in purchase originations, following an extraordinarily slow 2023.”

Mortgage rates are heavily influenced by the yield on the Treasury’s 10-year bond. That yield dropped below 4% this week for the first time since August.

DoubleLine Capital CEO Jeffrey Gundlach said the news should get even better for refinancing homeowners and those hoping to buy a home. After the Fed decision, Gundlach predicted the influential 10-year Treasury yield will to the 3% range next year.

For months some housing pundits have warned of a housing market bubble that is about to burst in a wave of foreclosures. For the first time, foreclosures are rising but at a very slow rate.

Still, with home prices near record highs and high mortgage rates cutting into affordability, it may pay to keep an eye on the rate of foreclosures, especially what are known as “zombie” foreclosures.

Zombie foreclosures occur when the homeowner is in default and moves out, leaving the property vacant. ATTOM, a company that monitors real estate data, reports 1.3 million U.S. residences are currently vacant. That’s just 1.3% of the nation’s residences.

ATTOM reports that 311,508 residential properties in the U.S. are in the process of foreclosure in the second quarter of this year, up 4.3 percent from the first quarter of 2023 and up 20.2 percent from the second quarter of 2022. Those are not insignificant increases.

Some perspective

But putting those numbers in perspective, a moratorium on foreclosures was put in place at the beginning of the pandemic in 2020 and wasn’t lifted until the middle of 2021. Among current pre-foreclosure properties, 8,752 are empty because the occupants, reading the handwriting on the wall, have moved out. But compared to pre-pandemic years, that number is very small.

“Zombie foreclosures keep inching up as lenders pursue more delinquent homeowners in courts around the country,” said Rob Barber, ATTOM’s CEO. “All indications are that the number of zombie properties will keep going up slowly, given that foreclosures are up. But abandoned properties are still nothing more than a dot on the radar screen among the majority of neighborhoods. We are still a long way from the fallout after the Great Recession of the late 2000s, when this was a very real issue in many areas around the U.S.”

Role of subprime mortgages

The Great Recession’s housing market crash was caused by the proliferation of subprime mortgages that were handed out with little consideration of the buyer’s ability to afford the house. A wave of foreclosures began in 2007 that overwhelmed the market with a huge number of homes for sale.

The situation today is very different. Lending standards are very tight and currently, there are not enough available homes to meet demand.

While most U.S. neighborhoods have little or no zombie foreclosures, some states have more than others. The biggest increases from the first quarter of 2023 to the second quarter of 2023 in states with at least 50 zombie properties are in Texas, Ohio, Oklahoma, Georgia and Iowa.

As a two-year pandemic begins to wind down in the U.S., consumers are beginning to feel new kinds of stress in the form of record-high gas prices, soaring food costs, and rising interest rates. 

Foreclosures are also rising. In a recent report, real estate data firm ATTOM found that foreclosure filings in February totaled 25,833 – up 11% from January and 129% from February 2021.

LegalShield, a company serving 2 million households with a wide range of legal services, tracks clients’ call trends and, as far as real estate is concerned, has found them to be a valid and reliable leading indicator of what’s happening in the market.

“When we see a significant increase in calls from people calling about foreclosures, we know that it is going to have a negative impact on home sales, housing starts, and mortgage applications," said Legal Shield CEO Jeff Bell in an interview with ConsumerAffairs.

More ‘negative’ calls

Right now, Bell says his company is seeing an increase in “negative” calls about housing, including from people facing eviction from a rental property. 

He notes that this increase closely correlates with the expiration of eviction moratoriums and forbearance programs that were enacted years ago to minimize economic damage caused by the pandemic. Now that those programs have ended, the extent of the economic damage and consumer stress is being revealed.

“It was a particularly regressive policy decision to tell people to shelter at home or to lock down," Bell said. “By that I mean people who can only make their living by leaving the home were adversely affected. It was especially hard on women.”

And it could result in an increasing number of home foreclosures in the months ahead. At least, Bell believes that’s what the call trends are telling him.

“We are very concerned with the trends,” Bell said. “When we see that for the last four months the number of calls about foreclosure has been increasing, to us that is a sign that there will be a change in the number of foreclosures as well as a negative impact on the housing market overall.”

Foreclosures poised to spike higher

No one is predicting a wave of foreclosures like the one that crashed the housing market in 2008. Most of those home losses were attributable to subprime and adjustable-rate mortgages. However, the foreclosures coincided with the Great Recession.

Rick Sharga, executive vice president at RealtyTrac, an ATTOM subsidiary, expects to see double-digit month-over-month growth and triple-digit year-over-year increases in foreclosures well into the third quarter. 

"This isn't an indication of economic turmoil, or of weakness in the housing market; it's simply the gradual return to normal levels of foreclosure activity after two years of artificially low numbers due to government and industry efforts to protect financially-impacted homeowners from defaulting," Sharga said.

But with all the other economic challenges consumers are now facing, foreclosures bear watching since they could be an early sign of more than normal economic damage.

The 2008 financial crisis was marked by a tidal wave of home foreclosures that devastated the housing market for years.

The COVID-19 pandemic of 2020 hammered the economy and cost millions of jobs, but foreclosures remained surprisingly low. In fact, Black Knight, a housing data firm, reports that 2021 ended with a record low number of home foreclosures.

The company reports that just 0.24% of mortgage loans were in active foreclosure in December. Economists looking for a reason for the drop in foreclosures usually point to mortgage forbearance programs that the government put in place at the start of the pandemic. Those forbearance programs ended months ago, yet foreclosures keep falling. 

Unlike during the financial crisis, mortgage companies appear to be taking proactive steps to help their customers avoid losing their homes. Barbara, of Kaneohe, Hawaii, tells us her mortgage company, PHH, helped her family obtain a mortgage modification and get out of foreclosure.

“We have been able to stay current with our mortgage payments since then,” Barbara wrote in a ConsumerAffairs review. "The agents we worked with were very helpful in guiding us through this process."

Helpful mortgage agent

Diane, of Firestone, Colo., works for a builder who took steps to help a resident who was critically ill. This allowed the homeowner to sell his home before it fell into foreclosure. She credits the lender, 21st Mortgage Corp., and one of its employees with saving the man’s home.

“I was working with Shavronna and I want to let you know she went above and beyond to help get this deal through!” Diane told ConsumerAffairs. “I could not have helped this resident without her help on 21st' end.”

In the future, more help may be required from lenders. Black Knight reports that over half a million serious delinquencies remain on the books. The number of borrowers who are 90 or more days past due on their mortgages, including those in active forbearance, is more than twice as high when compared to pre-pandemic levels.

Louisiana is the state with the highest percentage of non-current home loans, at more than 7%. Mississippi is second at 6.91%, and West Virginia is third at 5.37%.

The Consumer Financial Protection Bureau (CFPB) has some hopeful news for Americans who were financially impacted by the pandemic and found it tough to make their mortgage payments. The bureau says it’s not too late to request pandemic-related hardship forbearance -- a program that 1.6 million borrowers have successfully used to their advantage so far.

Forbearance occurs when a mortgage servicer or lender allows a homeowner to temporarily pause mortgage payments or pay their mortgage at a lower payment. It doesn’t completely wipe out that obligation, mind you. Any payment reduction or paused payments have to be paid back when the homeowner has regained their financial footing.

What’s involved

There are two determining factors that a homeowner needs to know if they’re interested in the forbearance program:

• If the home loan is backed by HUD/FHA, USDA, or the VA, the mortgage servicer is authorized to approve initial COVID-19 hardship forbearance requests until the COVID-19 National Emergency is officially over. That may sound like an open-ended invitation, but the situation with the pandemic could change at any time, and it would be smart to get the paperwork in sooner rather than later.

• However, if the loan is backed by the government-sponsored agencies Fannie Mae and Freddie Mac, there is not currently a deadline for requesting initial forbearance.

You can check out the CFPB’s guide to find out which company services your mortgage. It’s also created a step-by-step guide on how to request forbearance. 

In addition to the federal government, the CFPB says some states are implementing or considering various mortgage relief options of their own, including the suspension of foreclosures. A list of those states is available here.

Key considerations

As mortgage servicers expand their operations to match the surge of forbearance exits, the agency says they need to keep in mind that not all borrowers are in the same financial situation. 

“Many borrowers may be vulnerable to a greater risk of harm due to a variety of personal circumstances, including poor health, mental decline, disability, caregiving for a child or loved one, having limited English proficiency, inadequate access to technology, or being a first-time homeowner. The effects of the COVID-19 pandemic may have exacerbated some of these vulnerabilities,” the CFPB stated.

Americans might be able to find some assistance from a housing counselor if they’re concerned about any of those circumstances becoming a hindrance in communicating with their servicer. The CFPB offers a link to those services on its website as well.