Q3 Update: Delinquencies, Foreclosures and REO

We will NOT see a surge in foreclosures that would significantly impact house prices (as happened following the housing bubble) for two key reasons: 1) mortgage lending has been solid, and 2) most homeowners have substantial equity in their homes.

Last week, CoreLogic reported on homeowner equity: CoreLogic: US Homeowners See Equity Gains Drop by More Than 5 Percent in Q3

In the third quarter of 2024, the total number of mortgaged residential properties with negative equity increased by 3.5% from the second quarter of 2024, to currently about 990,000 homes with negative equity, or 1.8% of all mortgaged properties. On a year-over-year basis, negative equity declined by 3%, or about 30,000 fewer homes in negative equity from the third quarter of 2023.

With substantial equity, and low mortgage rates (mostly at a fixed rates), few homeowners will have financial difficulties.

Some simple definitions (for housing):

Forbearance is the act of refraining from enforcing mortgage debt.

Delinquency is the failure to make mortgage payments on a timely basis.

Foreclosure is when the mortgage lender takes possession of the property after the mortgagor failed to make their payments. “In foreclosure” is the process of foreclosure.

REO (Real Estate Owned) is the amount of real estate owned by lenders.

Here is some data on REOs through Q3 2024 …

This graph shows the nominal dollar value of Residential REO for FDIC insured institutions based on the Q3 FDIC Quarterly Banking Profile released yesterday. Note: The FDIC reports the dollar value and not the total number of REOs.

The dollar value of 1-4 family residential Real Estate Owned (REOs, foreclosure houses) was mostly unchanged YOY from $747 million in Q3 2023 to $765 million in Q3 2024. This is historically extremely low.

Fannie Mae reported the number of REOs decreased to 6,481 at the end of Q3 2024, down 10% from 7,179 at the end of the previous quarter, and down 24% year-over-year from Q3 2023. Here is a graph of Fannie Real Estate Owned (REO).

This is very low and well below the pre-pandemic levels. REOs are a lagging indicator. REOs increase when borrowers struggle financially and have little or no equity, so they can’t sell their homes – as happened after the housing bubble. That will not happen this time.

Here is some data on delinquencies …

It is important to note that loans in forbearance are counted as delinquent in the various surveys but not reported to the credit agencies.

The percent of loans in the foreclosure process decreased year-over-year from 0.49 percent in Q3 2023 to 0.45 percent in Q3 2024 (red) and remains historically low. Loans in forbearance are mostly in the 90-day bucket at this point, and that has declined recently. From the MBA:

Compared to last quarter, the seasonally adjusted mortgage delinquency rate decreased for all loans outstanding. By stage, the 30-day delinquency rate decreased 14 basis points to 2.12 percent, the 60-day delinquency rate increased 3 basis points to 0.73 percent, and the 90-day delinquency bucket increased 7 basis points to 1.08 percent. …

The delinquency rate includes loans that are at least one payment past due but does not include loans in the process of foreclosure. The percentage of loans in the foreclosure process at the end of the third quarter was 0.45 percent, up 2 basis points from the second quarter of 2024 and 4 basis points lower than one year ago. emphasis added

Both Fannie and Freddie release serious delinquency (90+ days) data monthly. Freddie Mac reported that the Single-Family serious delinquency rate in October was 0.55%, up from 0.54% September. Freddie’s rate is up slightly year-over-year from 0.54% in October 2023. This is below the pre-pandemic lows. Freddie’s serious delinquency rate peaked in February 2010 at 4.20% following the housing bubble and peaked at 3.17% in August 2020 during the pandemic.

Fannie Mae reported that the Single-Family serious delinquency rate in October was 0.52%, unchanged from 0.52% in September. The serious delinquency rate is down year-over-year from 0.53% in October 2023. This is below the pre-pandemic lows. The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59% following the housing bubble and peaked at 3.32% in August 2020 during the pandemic.

The pandemic related increase in serious delinquencies was very different from the increase in delinquencies following the housing bubble. Lending standards have been fairly solid over the last decade, and most of these homeowners have equity in their homes – and they have been able to restructure their loans once they were employed.

And on foreclosures …

ICE reported that active foreclosures have decreased are near the records. From ICE: ICE Mortgage Monitor: Recent Vintage Borrowers Pounced on Early-Autumn Rate Drops as 300K+ Refinanced in September and October

Foreclosure starts rose by +12.2% in October, but remain down -12.3% year over year

Completed foreclosures increased more than 10% in the month but are still almost 10% below last year

The number of loans in active foreclosure rose by 1K (+0.7%) in October, but remains -34% below pre-pandemic levels

Due to ongoing VA foreclosure moratoriums, a number of mortgages that would have otherwise been referred to foreclosure are remaining seriously past due, elevating serious delinquency rates while muting foreclosure activity

The bottom line is there will not be a huge wave of foreclosures as happened following the housing bubble. The distressed sales during the housing bust led to cascading price declines, and that will not happen this time.