2023 Mortgage Trends and Foreclosure Rates

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.