No Foreclosure Tsunami Expected, But Maybe a Wave

By Doug Katz – 9/14/2022

The Calculated Risk Blog reported today on the outlook for delinquencies, foreclosures and REOs based on data from the second quarter of 2022.  The verdict was that numbers more or less aligned with expectations and that a massive increase similar to the 2008 housing crash was unlikely.  While this is a very positive for homeowners, it does further hinder the needed increase in available inventory for buyers and investors, but let’s look at the data.

During COVID, foreclosures dropped to record lows.  This was bolstered by blanket forbearance which is categorized as a 90-day late for analysis purposes.  So while the data initially looks alarming, it is not necessarily a true and accurate reflection of troubled homeowners because many took forbearance to maintain liquidity and cash flow during the uncertainty of COVID.  Simply put, they took forbearance to protect against delinquency and foreclosure when it may not have been needed skewing the numbers.  With record low rates coming out of the pandemic and a strong labor market, most returned to normal payment after a modification or refinance keeping foreclosures low.  Inflation and other market conditions, however, have begun to push these numbers up but not at an exceptional rate.  In fact, they have still remained below historical numbers.

Further analysis supports this with minor increase in REOs for Fannie Mae.  Aggregate numbers have remained not only significantly lower than historical norms but also too low to have discernable impact on inventory.  Even if the number continues to increase, it will not be a cliff like we saw in 2008.  From the article:

Both Fannie and Freddie release serious delinquency (90+ days) data monthly. Fannie Mae reported that the Single-Family Serious Delinquency decreased to 0.76% in July from 0.81% in June. The serious delinquency rate is down from 1.94% in July 2021. 

Freddie Mac reported that the Single-Family serious delinquency rate in July was 0.73%, down from 0.76% June. Freddie’s rate is down year-over-year from 1.74% in July 2021.

As I wrote at the beginning, this is great news for homeowners.  Less are losing their homes which is generally a good thing.  With distressed properties being a key source for projects that provide a decent return on investment, however, this is a big blow to investors who have been sitting on the sidelines through COVID waiting for opportunities to arise.  With the added challenge of sellers deciding not to list, investors are experiencing an unprecedented drought.

This could definitely could definitely change with some of the potential issues coming down the road.  Inflation is still well above Fed targets which is both straining household budgets and pointing to further Fed Funds Rate increases.  Financial markets are getting pummeled and there is more and more expectations that we will see a recession with all of the things that accompany it, including housing delinquencies and foreclosures which should open more opportunities for investors.

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