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Strong Equity Stakes May Not Hold Off Foreclosure Starts

The Data & Analytics Division of Black Knight has released its latest Mortgage Monitor Report, which found that just 7% of homeowners in forbearance have less than 10% equity after including 18 months of deferred payments; however, the potential for foreclosure activity persists regardless.

According to Black Knight Data & Analytics President Ben Graboske, the data suggests that the healthy stores of equity in the hands of homeowners currently in forbearance may not be sufficient on its own to ward off foreclosure activity. While homeowners with limited equity were much more likely to be referred to foreclosure during the early stages of the Great Recession, foreclosure start rates on 120-plus-day delinquencies have been relatively similar regardless of equity position from 2010 onward.

"An analysis of our McDash loan-level mortgage performance dataset back to 2007 shows that holding equity in one's home might not be a blanket backstop to foreclosure activity," said Graboske. "Borrowers with limited equity were much more likely to be referred to foreclosure during the early stages of the Great Recession than those with strong equity positions. But foreclosure start rates on homeowners who were 120 or more days past due have been relatively similar regardless of equity stakes from 2010 on, with borrowers in the strongest positions only slightly less likely to be referred to foreclosure. So, while we may see some variation in foreclosure activity based on the equity levels of borrowers who are unable to return to making payments post-forbearance, those with strong equity won't necessarily be immune to foreclosure referral.”

Black Knight also found that high-equity borrowers were more than 40% less likely to face the involuntary liquidation of their home (via short sale, foreclosure sale, deed-in-lieu, etc.) than borrowers with weaker equity positions.

"The same data also shows that borrowers with strong equity stakes are more than 40% less likely to face the involuntary liquidation of their homes than borrowers with weaker equity positions, limiting both potential losses on such mortgages and distressed inflow into the housing market,” said Graboske. “Still, even among borrowers with 40% equity stakes who are referred to foreclosure, some 30% in recent years have lost their home to foreclosure sale, short sale, deed in lieu, etc. What the data doesn't tell us is why so many people who could avoid involuntary liquidation by selling through traditional channels simply do not end up doing so. Whether that's due to lack of understanding of their equity positions or the foreclosure process in general is unclear. But given the large number of high equity homeowners currently struggling to make their payments, this represents a significant challenge for the industry: how to educate struggling homeowners on the post-forbearance, foreclosure and–if needed–home sale processes, to limit unneeded stress on homeowners and the market alike."

Even among borrowers with less than a 60% combined loan-to-value (LTV) ratio, 30% of those referred to foreclosure ultimately faced involuntary liquidation, suggesting that many who could sell to avoid losing their home to foreclosure are not always doing so.

However, the report also finds that the white-hot housing market, which has driven homeowner equity to record-breaking heights, is starting to show signs of cooling. According to the Black Knight HPI, annual home price growth slowed from an all-time-high of 19.4% in July to 19% in August, marking the first decline seen in the rate of annual appreciation in 15 months.

Daily tracking data from Black Knight’s Collateral Analytics group suggests further cooling in September as well. Any slowdown in appreciation will likely be welcomed by potential homebuyers, who have seen the monthly payment required to purchase the average priced home with a 20% down 30-year fixed rate mortgage increase by nearly 20% (+$210) over the first nine months of 2021.That brings the average monthly mortgage payment to its highest level since late 2007.

Annual home price growth slowed from an all-time-high of 19.4% in July to 19% in August, marking the first decline in the rate of annual appreciation in 15 tracking data months, with daily for September suggesting that further cooling of the market is on the way. This may prove to be welcome news for potential homebuyers, as the monthly payment required to buy the average priced home with a 20% down, 30-year fixed rate loan is the highest it's been since late 2007, despite still historically low interest rates.

According to Redfin analysist Tim Ellis, new data shows that asking prices of newly listed homes are up 12% year-over-year to a median of $361,250, an all-time high. While the market is still red-hot, some metrics collected by Redfin in September covering 400 metro areas are beginning to cool, as is expected for this time of year.

According to Black Knight data, it now requires 21.6% of the median household income to make the monthly mortgage payment on the average home purchase, making housing the least affordable it's been since 30-year rates rose to nearly 5% back in late 2018. Since the Great Recession, home price growth has begun to slow when such payment-to-income ratios hit approximately 20.5% or higher, but low inventory levels in recent months have led to record home price growth even with tightening affordability.

“Any further rate increases–such as those seen in the week following the Federal Reserve's announcement on tapering–will only exacerbate the affordability side of the equation,” said Graboske. “For example, should home prices and incomes hold steady, but interest rates rise to 3.5%, the average monthly payment would rise by more than $100 and home affordability would hit a 12-year low. At 4%, the payment-to-income ratio would climb above its pre-Great Recession (1995-2003) average. If rates climb back to 5% as in late 2018, it would require $380 (+29%) more per month to buy the average-priced home than it does today, with affordability reaching the lowest levels on record outside of the 2004-2008 period.”

About Author: Eric C. Peck

Eric C. Peck has 20-plus years’ experience covering the mortgage industry, he most recently served as Editor-in-Chief for The Mortgage Press and National Mortgage Professional Magazine. Peck graduated from the New York Institute of Technology where he received his B.A. in Communication Arts/Media. After graduating, he began his professional career with Videography Magazine before landing in the mortgage space. Peck has edited three published books and has served as Copy Editor for Entrepreneur.com.
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