Mortgage delinquencies inch higher, equity shields homeowners — for now

The share of delinquent loans secured by a one-to-four-unit residential property increased to 3.62% in the third quarter (Q3) of 2023, according to the Mortgage Bankers Association (MBA).

Q3 2023’s mortgage delinquency rate is up from 3.37% in Q2 2023 (a record low) and 3.45% a year earlier.

The increase was due fully to greater numbers of 30- and 60-day delinquencies. However, 90-day delinquencies — which typically indicate a rise in foreclosure rates — actually declined in Q3 2023.

The MBA report suggests the reason for fewer 90+ day delinquencies is that most delinquent homeowners are still able to pursue a traditional home sale when they become delinquent due to a loss of income. Thus, they are able to bail out before reaching that 90+ day delinquency status.

The result: at just 1.52%, today’s foreclosure and 90+ day delinquency rate is the lowest in decades.

But the MBA forecasts today’s low delinquency rate will not remain the case for long, as a weakening jobs market portends more delinquencies in 2024. When delinquencies pile on, more forced sellers will enter the market, and declining prices will eat away that equity cushion low mortgage rates built up in recent years.

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Negative equity looms

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, 20% of mortgages that were 90+ days delinquent were hindered by negative equity as of December 2023, according to Black Knight. These homeowners are unable to complete a traditional home sale to avoid foreclosure. Further, 10% of mortgages 90+ days delinquent have a near-negative equity status, with less than 10% equity.

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

Most of these were no- and low-equity mortgages issued in 2022 and insured and guaranteed by the FHA and VA, which have little to no down payment — skin in the game — requirements.

By loan type, the delinquency rate as of Q3 2023 is:

• 5% for conventional loans;
• 76% for U.S. Department of Veterans Affairs (VA)-guaranteed loans; and
• 5% for Federal Housing Administration (FHA)-insured loans.

Without at least 10% equity in a property, a traditional sale is not possible — and when a maxed-out LTV mortgage goes unpaid, foreclosure or a lender-approved short sale follows.

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The broker’s solution

Since home prices have fallen from their May 2022 peak, the negative equity share has bounced. Absent a brief spring uptick, home prices have leveled and will continue to fall as sellers (reluctantly) respond to homebuyers’ reduced purchasing power.

As this narrative escalates in 2024-2025, a rise in real estate owned (REO) property will develop as banks react to increasing delinquencies.

As a general rule, when going into the foreclosure stage, mortgage lenders lack the staff to properly manage trustee’s sales or work out payment moratoriums for recently unemployed homeowners. Thus, the lender starts foreclosure and bids on the property for the amount of the debt rather than accept the price a 3rd party bidder is willing to pay at the auction.

The result is the lender becomes the owner, and the property becomes classified as REO inventory, which needs to be resold.

Real estate agents can prepare to take advantage of the buildup of distressed properties by becoming the lender’s solution to their REO problems. This includes:

• becoming a property manager of REO property to ensure regular income when traditional listings are sparse and landlords experience unresolved vacancy issues;
• acting as a listing agent of REO property by making contacts with mortgage servicing companies which see their REO inventory rise to an unmanageable workload number; and
• preparing to invest as a real estate syndicator purchasing REO property at a steep discount for a long-term rental property investment.

When saddled with selling REO inventory for lack of bidders at foreclosure sales willing to outbid the lender, lenders will eventually turn to accepting short sales to buyers located by owners-in-foreclosure.

Beginning around 2027, prices will gradually rise as we cycle from recession into recovery. Until then, agents will turn to every segment of the market to continue to do deals and make a living. Creative optimists at work.

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