September 2020 Economic Outlook:
Mortgage Delinquency on the Rise

By Frank Nothaft Housing Affordability, Real Estate

The pandemic plunged the U.S. economy into a deep recession that it has begun to climb out of.  But the income shortfall has exposed many homeowners to the specter of loan delinquency and possible loss of their home through foreclosure or short sale.

Figure 1: Two Triggers Can Cause a Homeowner to Lose Their Home
Source:Source: CoreLogic Inc.
© 2020 CoreLogic,Inc., All rights reserved.

The homeowner’s path from on-time payment to foreclosure generally involves two important trigger events.  One is a sudden loss of income, often the result of unemployment.[1]  While the federal income tax rebate and unemployment insurance supplement helped to ease the income deficit, many household heads who lost their jobs nonetheless had limited savings to rely upon to remain current on their mortgage.

The second trigger is loss of home equity, generally because of a fall in home prices.  Homeowners that currently have a high loan-to-value may lose all their equity when prices decline.

Figure 2: Job Loss & Home-Price Weakness Spark Delinquencies
Source:Source: CoreLogic Home Equity Report (as of March 31, 2020)
and HPI Forecast July 2020-to-July 2021 (September 1, 2020);
U.S. Bureau of Labor Statistics (July 2020 state unemployment rate)
© 2020 CoreLogic,Inc., All rights reserved.

To illustrate, Nevada has been especially hard hit because it has a large share of employment in travel, entertainment, hospitality, retail and restaurant jobs: the July unemployment rate was 14%, and the CoreLogic Home Price Index Forecast predicts a 6% price decline in the coming year.  If forborne mortgage payments are added to the loan balance, then home equity is also reduced.[2]  As of March, 3% of Nevada homeowners with a mortgage already had negative equity, and another 3% had 10% or less home equity.[3]  Thus, as many as 6% of mortgaged homes may be at heightened risk of foreclosure or short sale if unemployment remains high and home prices fall.

Figure 3: Serious Delinquency May Rise 4x from Feb. 2020 to Nov. 2021
Source: CoreLogic TrueStandings Servicing, HPI Forecast and serious delinquency forecast;
IHS Markit (August 2020 unemployment rate forecast);
serious delinquency is at least 90 days delinquent or in foreclosure proceedings
© 2020 CoreLogic,Inc., All rights reserved.

To estimate what could happen nationally, the U.S. unemployment rate and home-price change were used to model serious delinquency rates.  Various unemployment and home-price scenarios were then used to simulate what could happen over the next two years, barring any additional government relief programs after the CARES Act.[4]  In the most likely scenario, by yearend 2021 the serious delinquency rate has risen four-fold compared with its pre-pandemic level, placing 2 million families 90-days-or more delinquent or in foreclosure proceedings.

© 2020 CoreLogic, Inc. All rights reserved.

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[1] Changes in the health or composition of the family (for example, illness, divorce, or unexpected death of the household head) are other triggers that can cause income loss. 

[2] For example, a borrower with a recently originated $200,000 30-year loan at 4.5% interest that had 6 months of forborne payments added to their loan balance would have about a 3% (or $6,000) increase in their loan balance. 

[3] Negative equity occurs when the remaining loan balance exceeds the current home value.

[4] The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020.  The CARES Act provided mortgage forbearance for homeowners with federally backed home loans who were affected by the pandemic recession, among other provisions.