The real estate market is experiencing a slight rise in foreclosure activity following an extended period of moratoria that paused any foreclosures during the pandemic. The uptick in foreclosures could signal homeowner distress due to recent difficult economic circumstances but also account for foreclosures that were in the pipeline prior to the pandemic.
However, the foreclosure situation is not as serious as what we’ve seen in the past, since some mitigating circumstances are preventing a full-blown crisis. For one, the mortgage servicing industry adopted some COVID-era, rescue-type packages where a house does not go into immediate foreclosure. But more broadly, since the Great Recession in 2008, there has been a greater implementation of standardized loss-mitigation measures designed to prevent a foreclosure crisis.
As a result, CoreLogic’s Loan Performance Index pegs the overall U.S. foreclosure rate at 0.3% for the past 22 months after a slight increase from 0.2% in early 2022 — the lowest foreclosure rate recorded since 1999. In fact, following an initial jump in foreclosure activity in 2022 and early 2023, the foreclosure rate in most areas has declined.
In addition, the increase in foreclosure activity remains concentrated in certain markets. For example, since the low two years ago, the foreclosure rate has increased the most in Louisiana and the District of Columbia, up by 26 and 28 basis points, respectively, to 0.63% and 0.56%. New York is the market with the highest foreclosure rate at 1%, and this is only 8 basis points higher than one year ago and up 3 basis points from two years ago.
Looking at absolute changes, the largest two-year foreclosure increase was in Texas, which had slightly more than 2,150 more homes in foreclosure than two years ago, though that increase amounts to only a 6 basis-point increase in the foreclosure rate. Also, following that surge, the foreclosure rate has declined in Texas over the last year.
Looking at absolute changes, the largest two-year foreclosure increase was in Texas, which had slightly more than 2,150 more homes in foreclosure than two years ago, though that increase amounts to only a 6 basis-point increase in the foreclosure rate. Also, following that surge, the foreclosure rate has declined in Texas over the last year.
Although increasing foreclosures remains a concern, CoreLogic data suggests that the problem is localized, affects only a narrow range of homeowners across the U.S. and is specific to certain demographics and places. Unlike during the last downturn, current foreclosure trends are more confined to local markets, where the cost of living in certain counties may have skyrocketed, affecting homeowners whose income cannot keep up with inflationary pressures.
The impact of tax and insurance liabilities
There are some growing concerns stemming from inflation and the rising costs of property taxes and insurance premiums, which may be problematic for some households, particularly older Americans with fixed incomes. With home values across the U.S. rising dramatically in the past few years, some owners cannot afford the proportional increase in tax bills.
According to a February CoreLogic analysis, the average U.S. property tax bill increased by about 24% in 2023 compared with 2019; in some states, such as Texas, the property tax hike amounts to over $1,000 per year. And while the same increase can be seen in other, more expensive states, it is relative housing affordability that has contributed to demand in Texas. Thus, the increase may hit households with lower and fixed incomes harder, including older Americans.
Aside from taxes, property insurance costs have also risen, and coverage may even be difficult to find in some areas. More frequent and catastrophic occurrences of natural disasters have caused devastation throughout the U.S., creating chaos in property insurance markets.
In a July 2023 report, CoreLogic discussed the impacts of announcements from many well-known property insurers that decided to exit some states, particularly Florida, California and Texas. Population growth and continued construction in these high-hazard areas has led to concentrations of risk and a related rise in exposure values and replacement costs for insurance companies, factors that will continue to drive increases in premiums and reduced coverage for households.
Mitigating factors curbing the rise of foreclosures
Even though foreclosures have hit select areas of the country harder, mitigating factors have alleviated the problem for most U.S. borrowers. First, improvements in the loss-mitigation waterfall since the Great Recession and more recent pandemic forbearance and deferral programs have been instrumental in preventing a large-scale foreclosure crisis.
In addition, to address the problem of borrowers having difficulty keeping up with their mortgage payments, the Biden administration has launched programs to assist owners at risk of losing their homes. One example is the Homeowner Assistance Fund, established within March 2021’s $1.9 trillion American Rescue Plan. The program has made considerable progress in assisting homeowners who are in distress, so far benefitting more than 450,000 Americans.
The current administration’s newest effort to address the foreclosure problem is through the Federal Housing Administration (FHA)’s new program named the Payment Supplement. This program provides mortgage servicers with an additional tool to reduce the amount borrowers pay instead of pursuing foreclosure. The new offering is the latest in the FHA’s loss-mitigation efforts.
This program allows servicers to temporarily reduce borrowers’ monthly mortgage payments by up to 25% without changing their interest rate. It helps borrowers not fully assisted by existing FHA home-retention programs, since their mortgage rate is lower than current rates. Upon implementation, Payment Supplement allows mortgage servicers to temporarily reduce a borrower’s payment by using funds from a Partial Claim, enabling borrowers to access up to 30% of the outstanding balance of their FHA-insured mortgage.
On top of these developments, the government announced in January a plan to purchase veterans’ missed mortgage payments from lenders. The announced initiative would help prevent foreclosures for veterans who own homes.
Other underlying factors are also helping keep foreclosure rates low. Borrowers have better credit profiles and are less likely to default. Lenders can more effectively screen borrowers with improved technology, such as automated mortgage systems and data analytics. And with the generally sustained acceleration in home prices, more borrowers have gained enough equity to prevent going into foreclosure, which gives those who are delinquent the ability to find options other than defaulting on their mortgages.
