Mortgage Failures Spark Fears of Foreclosure Spike

Mortgage delinquencies are rising 15 percent year-over-year, signaling a potential increase in foreclosures as American households grapple with inflation, low housing supply and high mortgage rates.

The trend marks the sixth consecutive quarter of delinquency increases, according to TransUnion's Credit Industry Insights Report, adding more pressure to an already distressed housing market.

"Delinquencies increased across all stages (early, mid and late) and all loan types," Joe Mellman, senior vice president and mortgage business leader at TransUnion, said in a statement.

The spike in delinquencies is significant because once a mortgage payment is more than 90 days overdue, the possibility of foreclosure becomes imminent. It is feared hundreds of thousands of Americans could be impacted by foreclosure.

While mortgage delinquencies remain near historic lows, the 15 percent uptick reflects the 60-day mortgage delinquency rate which edged up to 1.02 percent, a 0.13 percentage point rise from the third quarter of 2022, and notably, a 0.22 percentage point increase from the same period in 2021.

Historically, periods of increased delinquency have led to heightened foreclosure activity, a pattern echoed in recent data from ATTOM's Midyear U.S. Foreclosure Market Report, which showed an alarming increase in foreclosure filings.

Data from ATTOM's report showed that there were 185,580 U.S. properties with foreclosure filings in the first half of 2023—an increase of 13 percent from the year prior and a 185 percent from two years ago.

"Although overall foreclosure activity remains below historical norms, the notable surge in foreclosure starts indicates that we may continue to see a rise in foreclosure activity in the coming years," ATTOM CEO Rob Barber said in the report.

The rise comes after years of high foreclosure rates following the 2008 financial crisis and reflects the growing financial stress households are experiencing in the wake of the COVID-19 pandemic.

In particular, ATTOM's report found that states like Maryland, Oregon, and Alaska have seen foreclosure activities double compared to last year. This resurgence is especially notable as foreclosure starts increased by 15 percent from last year, indicating that many homeowners are reaching critical points in their ability to manage mortgage payments.

Aside from delinquency rates, mortgage balances climbed to near record highs of $11.8 trillion, a 3 percent year-over-year increase, according to TransUnion. However, the surge in balances is overshadowed by a 37 percent drop in mortgage originations compared to the same period last year, falling to levels reminiscent of the second quarter of 2014.

The composition of new mortgages, predominantly from purchase originations (87 percent), reflects a substantial downturn in refinancing, which mirrors the tightening grip of current economic conditions.

TransUnion's data also exposes a trend in the health of mortgage vintages. Mortgage vintages, delineating the cohorts of loans initiated in the same time frame, serve as a barometer for the lending climate over time. The graph below shows the trajectory of delinquency rates—the proportion of loans past due by 60 days or more—categorized by the quarter of origination.

Vintage performance "shows deterioration in more recent originations," Mellman said, adding that "new mortgage vintages are performing worse than vintages of the past four years."

Recent loan vintages, particularly those from the third quarter of 2021—with an average mortgage rate of 2.98 percent—and those from 2022, when rates rose to an average of 5.90 percent, are exhibiting rising delinquency rates at a notably earlier stage in their term. The trend starkly contrasts with the more mature vintages of the third quarter of 2017 through 2020, suggesting that the financial stability of loans initiated under current economic conditions may be under unprecedented pressure.

These vintage performances are set against a backdrop of aggressive rate hikes by the Federal Reserve, the likes of which have propelled its benchmark rate to a 22-year high. The sharp pivot from the near-zero rates at the onset of its monetary policy shift in 2022 to the present rates—hovering between 5.25 percent to 5.5 percent for the third quarter of this year—has transitioned borrowing from highly accessible to notably costlier.

Mortgage rates have surged to 7.47 percent, a substantial climb from the 2.78 percent to 3.18 percent range in the third quarter of 2021, and mirror the tightening economic straits households are navigating.

Strained Consumer Confidence and Equity Shifts

Though, the TransUnion report indicates a slight year-over-year uptick in home equity, now totaling approximately $19.7 trillion, which Mellman said will help homeowners ease debt pressures. While home equity lines of credit (HELOC) and home equity loan originations dipped from their previous highs, they maintain a strong presence above the levels seen between 2008 and 2021.

The data suggests that despite tighter lending and borrowing conditions, homeowners still have a valuable equity cushion.

Parallel to TransUnion's findings, the Federal Reserve Bank of New York's report issued Tuesday illustrates a broader increase in household debt, with a notable $228 billion rise in the third quarter of 2023 alone.

Mortgage debts led the pack, contributing $126 billion to the total household debt now standing at $17.29 trillion.