Why mortgage delinquencies remain stable despite more economic stress

Overall delinquencies and forbearance rates keep improving despite the fact that financial pressure on consumers is growing, and statistics in a few recent reports offer some possible reasons why.

For one, enough relief is still available from lingering payment suspensions to cushion the blow from higher inflation and borrowing rates. 

In aggregate, the number of loans in forbearance continued to fall in the Loan Monitoring Survey that the Mortgage Bankers Association released Monday, but more slowly than previous month, dropping by just 4 basis points in June to 0.81%. In May, the forbearance rate had dropped 9 basis points.

And while the rollback of forbearance and other pandemic-related workout constraints have increased the number of private-label securities borrowers starting foreclosure, relatively strong employment options and relief still available appear to be blunting the impacts.

As early as the first quarter, foreclosure actions in the private-label residential mortgage-backed securities market had risen to 2% from 1% for bank servicers, and to 3% from 2% for nonbanks, according to a Fitch Ratings report released Friday. 

But loans in residential mortgage-backed securities that haven’t been paid for more than 90 days dropped to 5% on a consecutive-quarter basis from 7% at depositories and to 4% from 5% for non-depositories. Shorter-term (60-day-plus) delinquencies and bankruptcy rates have remained largely unchanged.

Those delinquency trends were due in part to the effectiveness of foreclosure alternatives like loan-term modifications that accommodate changes in financial circumstances, and public assistance available through the state-distributed Homeowner Assistance Fund program, according to Fitch.

“From conversations that we’ve had with servicers, it sounds like for a lot of people that have come off forbearance, the foreclosure action has started but that’s kind of a wake-up call. After that, they’re able to get in touch with people who can explore what alternatives they have,”  Richard Koch, a structured finance director at Fitch, said in an interview.

The share of loans that bank servicers modified jumped to 38% from 24% on a consecutive-quarter basis. Nonbank servicers, which tend to have lower modification rates than depositories, also saw a rise to 21% from 20% the previous quarter. Other foreclosure alternatives like short sales and deed-in-lieu transactions also rose slightly and accounted for 26% of all loss mitigation activity in the first quarter.

Such strategies appear to limited the number of foreclosure starts that actually get completed, and have kept delinquencies contained, but experts warn mortgage payments are under an increasing amount of stress.

Some of the latest numbers on loan performance available from government-sponsored enterprises Fannie Mae and Freddie Mac do show a slight uptick in short-term delinquencies, which is telling given that these borrowers have recently been among the least risky in the market.

In April, the number of borrowers delinquent for 30 to 59 days rose to 229,462 from 207,829, according to a report released last week by Fannie and Freddie’s regulator, the Federal Housing Finance Agency.

Although Fitch hadn’t finalized its second quarter numbers or analysis at deadline, anecdotal reports from servicers and other trends to date suggest delinquencies could potentially rise in the private-label residential mortgage-backed securities market as well, according to Koch.

“With interest rates going up, it’s a little harder for people to refinance their way out of any problems they had when exiting forbearance. Also, it might get a little more difficult to get out from under because home equity shrinks with each month that interest rates go up and there’s a smaller universe of potential buyers,” he said.