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Black Knight Mortgage Monitor for August: "the longer borrowers remain in forbearance, the higher the post-forbearance non-performance rate"

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There are some important observations on the performance of forbearance exits (see near bottom).

Black Knight released their Mortgage Monitor report for August today. According to Black Knight, 4.00% of mortgage were delinquent in August, down from 4.14% of mortgages in July, and down from 6.88% in August 2020. Black Knight also reported that 0.27% of mortgages were in the foreclosure process, down from 0.35% a year ago.

This gives a total of 4.27% delinquent or in foreclosure.

Press Release: Strong Equity Stakes Alone May Not Be Enough to Stave Off Foreclosure Starts, But Will Reduce Inflow of Distressed Properties Into Housing Market
Today, the Data & Analytics division of Black Knight, Inc. (NYSE:BKI) released its latest Mortgage Monitor Report, based upon the company’s industry-leading mortgage, real estate and public records datasets. Given Black Knight’s recent analysis of the strong equity positions of borrowers in forbearance, even when adding 18 months of deferred payments to their debt loads, this month’s report explores the relationship between such equity positions and downstream foreclosure start rates and – ultimately – distressed liquidations. 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.

“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.

“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. 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.”
emphasis added

Click on graph for larger image.

Here is a graph on delinquencies from Black Knight:o At 4% in August, the national mortgage delinquency rate is now at its lowest level since the onset of the pandemic early last year

o A 108K loan decline in serious delinquencies in August was partially offset by 14K and 11K rises in 30-day and 60-day delinquencies, respectively

o Despite the overall improvement, serious delinquencies remain more than 3X (+930K) pre-pandemic levels, while early-stage delinquencies (30/60 days) remain approximately 40% below pre-pandemic levels

o At the current rate of improvement, the overall national delinquency rate would be on pace to return to pre-pandemic levels by early 2022
And on the current status of loans that have exited forbearance:
o Nearly 3.7M borrowers exited forbearance plans in 2020, with the largest volumes in July and October as early entrants reached the three- and six- month points in their plans

o Exit volumes tapered off in early 2021, but picked up with 338K exits in August, and are expected to rise in coming months as early plan entrants reach their final expirations

o Post-forbearance performance among those who’ve exited has varied, with borrowers who remained in plans longer – and exited later – having more trouble getting back to making payments

o A large share of recent exits remains in active loss mitigation, working through post-forbearance options, so it will be a few weeks before August/September exit performance trends become more discernible

o That said, a clear pattern has emerged: the longer borrowers remain in forbearance, the higher the post-forbearance non-performance rate, with the current high-water mark the 9% non-performance rate seen among July plan exits

o Non-performance rates among those borrowers facing final plan expirations in coming months will dictate the ultimate downstream impacts on both foreclosure activity as well as the broader housing marketThere is much more in the mortgage monitor.

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