Foreclosure activity increased in the second half of 2021, but is far below historic normal and hardly the "foreclosure wave" some predicted.
Foreclosure activity increased substantially in the third quarter, but it’s hardly the mass event forecasted by some earlier in the year.
Foreclosure starts were up 32% percent from Q2 and 67% from last year, according to the Q3 2021 U.S. Foreclosure Market Report from ATTOM. In September, there were 19,609 properties in the U.S. with foreclosure filings, up 24% from August and 102% from the previous year.
The uptick in foreclosure activity looks steep and is due almost entirely to the federal foreclosure moratorium ending on July 31. But the Q3 data is somewhat misleading.
Prior to Q3, there were virtually no new foreclosure filings for the five quarters the moratorium was in place. When it ended, foreclosure activity resumed for the first time since early 2020, but at a slower pace.
"Despite the increased level of foreclosure activity in September, we're still far below historically normal numbers," said Rick Sharga, executive vice president at RealtyTrac, an ATTOM company. "September foreclosure actions were almost 70 percent lower than they were prior to the COVID-19 pandemic in September of 2019, and Q3 foreclosure activity was 60 percent lower than the same quarter that year. Even with similar increases in foreclosures over the next few months, we'll end the year significantly below what we'd see in a normal housing market."
Lenders started the foreclosure process on 25,209 properties in Q3 2021 -- a 67% increase from last year. Sixty-seven percent sounds alarming, but it amounts to just 10,114 additional foreclosure starts during a quarter without a federal moratorium compared to a quarter with a federal moratorium.
Historically, foreclosure starts in Q3 were a fraction of a typical quarter.
In the last 15 years, there have typically been more than 100,000 foreclosure starts per quarter, making the 10,000 starts figure much less daunting, especially given the economic hardships caused by COVID-19.
And a total foreclosure count of around 25,000 represents a number 75% lower than normal. For those looking for a tidal wave of foreclosures leading to lower home prices, this is anything but that.
Out of 220 metropolitan areas, three saw more than 1,000 foreclosure starts in Q3 2021.
Metro area Foreclosure starts in Q3 2021 New York1,456Chicago1,122Los Angeles1,102Miami992Houston688
Other metros saw a decrease in foreclosure starts from Q2 to Q3.
Metro area Change in foreclosure starts from Q2 to Q3 Charlotte, N.C.-32%Portland, Ore.-26%Rochester, N.Y.-17%San Jose, Cali.-13%Hartford, Conn.-6%
"So far the government and the mortgage industry have worked together to do an extraordinary job of preventing millions of unnecessary foreclosures using the foreclosure moratorium and mortgage forbearance program," Sharga added. "But there are hundreds of thousands of borrowers scheduled to exit forbearance in the next two months, and it's possible that we might see a higher percentage of those borrowers default on their loans."
When the foreclosure moratorium ended in July, there was speculation that it would lead to a massive wave of foreclosures in the second half of 2021. But it seems a combination of federal initiatives and record home appreciation reduced this wave into a ripple.
In July, the Biden administration unveiled mortgage relief programs for government-backed loans which included payment reduction plans, loan term extensions, and zero-interest second mortgages.
In October, the Consumer Financial Protection Bureau (CFPB) extended the deadline to request initial forbearance for borrowers facing COVID hardships. FHA, USDA, and VA loan borrowers can request forbearance until the COVID-19 National Emergency declaration is over, and there is no deadline to request forbearance on mortgages backed by Freddie Mac and Fannie Mae.
In addition to government programs, homeowners are benefitting from a year of near-20% home appreciation and a hot, seller-friendly market. Neither of these factors were present during the 2008 housing crash and ensuing foreclosure wave.
According to Dr. Frank Nothaft, Chief Economist for CoreLogic, today’s delinquent homeowners are in a position to use home equity and appreciation to get out of a jam.
“Even if loan modification or income recovery is unable to help delinquent homeowners become and remain current on their payments, the double-digit rise in home prices may help them avoid a distressed sale,” Nothaft said. “Homeowners with substantial home equity are far less likely to experience a foreclosure sale, and fortunately, the CoreLogic Home Equity Report found the average owner gained $51,500 in equity in the past year — a five-fold annual increase.”
The latest data from CoreLogic shows that the nation’s overall delinquency rate -- homeowners with payments 30 days or more past due -- in July was 4.2%, down from 6.5% the previous year. However, the serious delinquency rate (homeowners with payments 120+ days past due) in July of 2.4% is identical to the year prior. These seriously delinquent borrowers likely represent the uptick in foreclosure starts in Q3.
Foreclosure activity will likely increase in Q4 2021 and perhaps into 2022. However, early data suggests a mass wave of foreclosures is unlikely and overall foreclosure activity is well-below historical norms.