Mortgage delinquencies are back to healthy numbers at the start of 2022 and are now nearly level with pre-pandemic levels. But as government supports lift across all sectors of the economy, can this low level be sustained?

Nationally, the share of one-to-four unit mortgage loans in some stage of delinquency but not yet in foreclosure decreased to 4.65% in the fourth quarter (Q4) of 2021, according to the Mortgage Bankers Association (MBA).

For historical reference, Q4 2021’s rate was below the average mortgage delinquency rate going back to 1979 of 5.3%. Delinquencies have steadily fallen since recently peaking in Q2 2020 at 8.2%.

Still, the share of seriously delinquent mortgages (90+ days delinquent) was slightly above average, at 2.83%.

By loan type, the share of mortgage loans delinquent in Q4 2021 was:

  • 10.8% for Federal Housing Administration (FHA)-insured loans, down from 14.7% a year earlier;
  • 5.2% for U.S. Department of Veterans Affairs (VA)-guaranteed loans, down from 7.3% a year earlier; and
  • 3.6% for conventional loans, down from 5.1% a year earlier.

From the outset of the pandemic through Q3 2021, these delinquent homeowners were protected from foreclosure under the federal foreclosure moratorium. This temporary shield was able to keep jobless homeowners in their homes during the pandemic, enabling the foreclosure rate to drop to a record low of 0.03% of mortgages in Q3 2021.

As the delinquency rate has declined, the majority of homeowners with previously delinquent mortgages have been able to find a positive resolution — like becoming current or paying off the mortgage through a home sale. With record-low interest rates and elevated home prices catapulting homeowners into huge equity gains in 2021, a home sale was an easy option for any delinquent homeowner.

However, a small share of delinquent mortgages have begun to trickle into the foreclosure process following the expiration of the foreclosure moratorium.

Just over 700,000 homeowners were still protected by a forbearance program at the end of 2021. Thus, these delinquent homeowners still have a brief amount of time to find a solution before foreclosure becomes imminent. Just how long depends on the expiration of each homeowner’s forbearance program.

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Delinquencies are artificially low

Foreclosures have remained extremely low in Q1 2022, despite 2021’s expiration of the foreclosure moratorium. But with government supports now fully lifted, the housing market is about to receive its first real test of whether it can stand on its own.

The Federal Reserve (the Fed) is presently winding down their purchase of mortgage-backed bonds (MBBs) in March 2022. These purchases have helped keep mortgage interest rates low since 2020, but the Fed began purchasing less — their bond taper — in November 2021. Since then, interest rates have increased significantly.

This interest rate leap translates directly to decreased money available to homebuyers and refinancers, called buyer purchasing power. Absent an increase in pay or savings, this declining buyer purchasing power means homebuyers qualify for significantly less mortgage money today than they did a year ago. As of March 2022, this annual decrease in buyer purchasing power is 9.5%.

With 9.5% less mortgage money available than a year ago, and without sacrificing on their home search, buyers reliant on financing are stuck with less money for the same house. Some of those unwilling to settle for less will delay their homebuying plans while they wait for prices to fall in line with their finances. But most will continue to try their luck, offering less and less as interest rates continue to rise in the coming months, reducing home prices and values.

Lacking the support of falling interest rates, additional stimulus or income boosts, California home prices are expected to fall back heading into 2023. This declined market activity will reduce options for homeowners unable to make mortgage payments.

Without the additions of unemployment payments, paycheck protection programs, Fed-induced low interest rates and forbearance programs of the past two years, the mortgage delinquency rate would have been much higher. These unnatural driving forces have done their job to keep homeowners in place during the pandemic.

But now that these programs have expired and interest rates are rising, we are about to experience a free-standing housing market for the first time in two years. Real estate professionals: are you ready?

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