Serious delinquencies will soar in 2021 without more borrower aid

If there is no further government support for Americans whose income has been impacted by the coronavirus, the seriously delinquent mortgage rate will quadruple by the end of next year, CoreLogic predicted.

"Barring additional intervention from the federal and state governments, we are likely to see meaningful spikes in delinquencies over the short to medium term," said Frank Martell, president and CEO of CoreLogic, in a press release.

While President Donald Trump recently signed executive orders intended to provide further relief, members of Congress from both parties described the executive orders as “unconstitutional” and stated that they must agree to a relief package in order to provide extensions on the foreclosure and eviction moratoriums and other measures.

Currently the seriously delinquent rate — loans which are 90 days or more late — is rather low. In May, this rate rose to 1.2% from 0.9% one year earlier, while the foreclosure rate fell slightly to 0.3% from 0.4%. Both of those changes were likely because of foreclosure moratoriums instituted on the federal and state levels.

However, in a portent of what could happen down the road, May's overall mortgage delinquency rate was 7.3%, up from 3.6% for the same month last year.

"The national unemployment rate soared from a 50-year low in February 2020, to an 80-year high in April," said Frank Nothaft, CoreLogic's chief economist. "With the sudden loss of income, many homeowners are struggling to stay on top of their mortgage loans, resulting in a jump in non-payment."

The largest increase in delinquencies was in the 60 to 89 day bucket, which rose to 2.8% from 0.6%. For the 30 to 59 day bucket, the rate was 3%, compared with 1.7% in May 2019.

However, simply looking at mortgage delinquency rates alone ignores the dual triggers responsible for loans advancing from forbearance into foreclosure, namely economic hardship and lack of equity, a separate blog post written by First American Financial's Deputy Chief Economist Odeta Kushi argued. "It is only when both conditions exist that a foreclosure becomes a likely outcome."

Kushi pointed to foreclosure trends in the two previous recessions.

The unemployment rate among homeowners increased from 2.5% in the second quarter of 2001 to 3.7% one year later. But because of high levels of household equity leading up to the 2001 recession, nearly 64% — 12% above the historical average — the average number of new foreclosures barely increased.

But at the start of the Great Recession in 2008 and 2009, borrowers that already had low amounts of equity in their properties lost further ground as home values declined.

"Paired with soaring unemployment, which more than doubled for homeowners over the same time period, the dual trigger produced a wave of foreclosures, as foreclosure starts quadrupled compared with their pre-recession pace," Kushi said.

Today, in large part because of tighter underwriting standards, homeowners have more equity than during the Great Recession.

"New foreclosures during the Great Recession peaked in the third quarter of 2010 at 274,000, with a homeowner unemployment rate of 7.2%," Kushi said. "If unemployment reached that level today, we would expect less than 167,000 (nearly 40% fewer) new foreclosures in the second quarter of 2020 due to the higher levels of equity homeowners have today."

All states recorded an increase in delinquencies on a year-over-year basis, led by New Jersey and Nevada, with 6.4 percentage-point increases each. New York had a 6.1 percentage-point increase, while Florida experienced a gain of 5.8 percentage points.