The mortgage market has good news to report based on recent data, along with some bad.

In June 2021, the national delinquency rate reached its lowest level since the 2020 recession began, at 4.37%, according to a report from Black Knight. This was down from a year earlier when 7.6% of mortgages were delinquent.

This improved delinquency rate aligns with average rates seen between 2000-2005. Year-over-year, overall delinquencies decreased by 42.39%.

Here in California, 3.2% of loans are not current, representing a 51% year-over-year decrease. Metro areas characterized by strong job markets have seen the fewest delinquencies. This includes San Jose, which has a 90+ day delinquency rate of just 1.2%, and San Francisco, with a 1.7% 90+ day delinquency rate.

The comparatively lower delinquency rate in June across the country is attributed to:

  • a decline in new delinquencies; and
  • an increase in the number of mortgages becoming current.

Additional improvements in overall delinquency rates are expected for July as well, based on early mortgage data analyzed by Black Knight.

But, while overall delinquencies improved in June, serious delinquencies remain significant. 1.55 million homeowners or 3.20% are 90 or more days past due on their mortgage but not in foreclosure on the national scale.

Nationally, 1.1 million more serious delinquencies exist today than before the 2020 recession. Despite the prevalence of seriously delinquent mortgages, few foreclosures are being initiated. Only 0.27% of mortgages were in active foreclosure in June, another record low. That’s because the foreclosure moratorium and forbearance programs are still in place.

However, on September 30, 2021, many of the federal forbearance programs currently in place which allow homeowners to pause their payments will expire. Black Knight forecasts that at the current pace in delinquency rates, one million serious delinquencies are likely as the forbearance deadlines approach.

Serious delinquencies will impact the housing market

How will the projected one million homeowners with serious delinquencies impact the housing market in the months to come?

When the forbearance programs expire, homeowners will be expected to resume making mortgage payments. They will also need to repay missed payments during the forbearance period, though not necessarily in a lump sum. Homeowners seeking more information are advised to contact their servicer.

Mortgaged homeowners who are unable to resume making payments will be forced to sell their homes, or else wait for a foreclosure sale. Most will choose a straight home sale, an ability not afforded to those who lost jobs following the Great Recession. This time around, high levels of home equity due to rapid home price increases means the vast majority of homeowners are able to sell without taking a loss. This is preferable to a foreclosure sale, which significantly dents a homeowner’s credit score and prohibits them from qualifying for financing for seven years following foreclosure.

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Foreclosures, explained

In response to the predicted surge of homeowners exiting forbearance this year, the Consumer Financial Protection Bureau (CFPB) has modified its rules for lenders. Lenders will now need to conduct a pre-foreclosure review period with delinquent homeowners, a period which extends through December 31, 2021.

Thus, most foreclosures will be limited until 2022. That year will see a significant rise in the number of foreclosures and forced sales as forbearance programs and additional grace periods slowly unwind.

When the buildup of sales is released, the sharp rise in inventory will drag down home prices. Prices will bottom around 2023.

California won’t emerge from the effects of the 2020 recession until a jobs recovery is underway. Whether they return organically or through government-sponsored efforts, the return of jobs is key to the economic recovery.

firsttuesday anticipates this recovery will begin during 2024-2025, depending upon any further extensions of the moratoriums, additional stimulus programs and government-sponsored job creation.

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How foreclosures will impact the housing market in the wake of the 2020 recession