Serious delinquencies fall slowly as foreclosure ban decision looms

The number of mortgages that would normally be on the verge of foreclosure dropped another notch in May, but it remains relatively high, and that could factor into federal officials’ decisions related to when collections can move forward and whether to add additional housing relief.

There were almost 1.67 million mortgages that had gone unpaid for 90 days or more in May, down from almost 1.77 million the previous month, according to Black Knight’s First Look report. The May number, which includes payments temporarily suspended up to 18 months for pandemic-related hardships, is up from just 631,110 the same month a year ago; but it is still a far cry from its 2009 peak in the wake of the Great Recession when it approached 3 million. In addition, there were more than 2 million home loans in foreclosure at that time. (In May, there were less than 148,000 loans in foreclosure due to the bans, which generally allow only vacant properties to move forward in that process.)

The fact that there are fewer problem loans now than during the Great Financial Crisis, and both market conditions and the ability to process high volumes of distressed mortgages are generally considered more favorable now, federal officials may lean toward minimizing the number of borrowers displaced from their homes with further foreclosure moratoria extensions. (Although, to be sure, they want to avoid a situation where mortgage servicers have the kind of backlog of distressed borrowers that leads to a counterproductive erosion of home equity.)

“I think the thing to keep in mind is the majority of these loans...are in active forbearance or loss mitigation so they would largely be protected from foreclosure even if the federal moratorium ended,” said Andy Walden, economist and director of market research at Black Knight. “Certainly, there’s some foreclosure risk for borrowers who aren’t participating in loss mit with their servicers if moratoria end, but the CFPB could roll forward with additional protections for the remainder of the year.”

Federal foreclosure moratoria have been extended several times and most had a June 30 deadline at press time. The Consumer Financial Protection Bureau also has proposed additional housing relief that could include a new or extended foreclosure ban. The CFPB was still working on finalizing its proposal as of Wednesday afternoon.

“We remain committed to working with both servicers and homeowners to prevent avoidable foreclosures to the maximum extent possible. The economic recovery risks leaving some communities behind, and no one should lose their home without a chance to explore their options,” a CFPB spokesman said in an email.

Without intervention, Walden is forecasting that there could be “a massive workload” for servicers later this year as borrowers in the first wave of those who received their maximum 18 months of forborne payments for pandemic-related hardships hit the end of their terms. He estimates nearly 900,000 borrowers could fall into this category.

On the other hand, without that event, recovery at the gradual pace of improvement seen in serious delinquencies could be protracted, Walden noted.

“If we kept going like we’re going, it would take about 36 months for the delinquency rate to normalize back to pre-pandemic levels,” he said.