Mortgage delinquencies edge higher going into 2023

Underwater homeowners gain more company

While an economic recession is not yet official in 2023, consumers are struggling to keep up with everyday expenses — including housing payments.

3.0% of U.S. mortgaged loans were 30 or more days delinquent as of November 2022, up from the recent bottom of 2.75% in May 2022, according to Black Knight.

Here in California, 1.9% of mortgages are in some stage of delinquency as of November 2022. The share of delinquent mortgages has crept higher since bottoming at 1.7% in May 2022 — the same month that home prices peaked here in the state.

Underwater homeowners, owing more on their mortgage than their home’s current fair market value (FMV), are more likely to be delinquent on their mortgages than those in a positive equity position.

Nationally, 5% of mortgages originated in 2022 are underwater as of September 2022, and an additional 19% of mortgages originated in 2022 have less than 10% equity. The majority of these no- and low-equity mortgages are Federal Housing Administration (FHA)-insured and U.S. Department of Veterans Affairs (VA)-guaranteed loans, which have little to no down payment requirements.

A seller typically needs at least 10% equity to be in a position to sell and cover the 5%-6% broker fees as well as pay for any necessary repairs, improvements or other seller concessions demanded in a buyer’s market.

Related article:

Pandemic-era buying spree plunges homebuyers from minority groups underwater

The return of REO property

While the total share of delinquent mortgages remains low here in California — at just under 2% of all mortgaged homes — these delinquent homes are having an outsized impact on today’s housing market.

A recent firsttuesday poll asked readers: How many homes currently on the market are delinquent on mortgage or property tax payments?

184 readers responded, with:

• one-in-six saying 10% or less;
• one-in-six saying between 10% and 20%;
• one-in-three saying between 20% and 30%; and
• one-in-three saying 30% or more.

Since California consists of a wide range of metros and rural areas, our readers are reporting on vastly different markets. Therefore, in some parts of the state there are very few delinquent homes on the market, where others are seeing a third or more of listed homes delinquent on mortgage payments.

When a listing is delinquent, the sellers are placed in the uncomfortable position of conducting a forced sale. The delinquent seller is in no bargaining position and has no choice but to sell or face a credit-damaging foreclosure, losing all equity which they may have access to — for now.

As home values continue to plunge, this built-up equity will rapidly shrink and, for many who purchased in the last couple of years, disappear completely. Without access to equity, a traditional sale will no longer be possible, and foreclosure will follow. Then, a rise in real estate owned (REO) property will occur as the number of bank-owned properties swell.

Real estate agents can prepare to work with REO properties by:

• preparing to invest as a real estate syndicator who purchases REO property at a steep discount for a long-term rental property investment;
• becoming a property manager of REO property to ensure regular income when traditional listings are sparse; and
• acting as a listing agent of REO property by making contacts at local banks which will soon see their REO inventory rise to an unmanageable number.

While REOs are not yet a fixture in California’s housing market, the potential for REOs rises with each passing day of declining home values and rising delinquencies.

Ensure your future access to fees by forging relationships with key players in the REO landscape — namely, servicers and lenders — today.

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Related article:

MLO recession survival guide part 3: Working with REO property