The State of Mortgage Delinquencies

When we look at the state of mortgage delinquencies, we see some improvement in the short term or recent defaults. However, mortgage delinquencies continued to rise in July, according to CoreLogic’s new loan performance report. The company found that 6.6 percent of all mortgages were at least 30 days past due (including those in foreclosure.) This represents a 2.8-percentage point increase in the overall delinquency rate compared to July 2019 at 3.8 percent. However, it was a lower rate than the 7.1 percent reported for June, at that point, a 3.1-point annual increase.

Overall, serious delinquency improvements offset loans at least 90 days past due, including loans in foreclosure. That category surged from 1.3 percent in July 2019 to 4.1 percent. It is the highest serious delinquency rate since April 2014.

Further, the 120-day seriously delinquent bucket was the highest in the 21 years CoreLogic has been tracking the data. The company said the job market’s persistent instability pushed many homeowners further down the delinquency funnel this summer.

The foreclosure inventory, loans in some stage of the foreclosure process, is the lowest for any month in at least 21 years at 0.3 percent, down from 0.4 percent in July 2019. Most foreclosures actions are on hold due to the CARES Act. What happens when the CARES Act expires?

As measured by CoreLogic’s Home Price Index (HPI), home prices have been rising at an accelerated rate. Still, unemployment levels in hard-hit areas remain stubbornly high, leaving some borrowers house-rich but cash poor. With persistent job market and income instability, Americans continue to tap into savings to stay current on their home loans. But as savings run out, you could see borrowers pushed further down the road to foreclosure.

Boston Federal Reserve President Eric Rosengren put a damper on any enthusiasm when he said, “I expect a wave of defaults and bankruptcies to hit that will aggravate an unemployment problem that has hit lower-wage workers disproportionately.

Now Is the Time to Get Ready

The opportunity awaits the note investor. As we wrote in Due Diligence Steps in Notes Investing, do your initial due diligence. You want to perform a high-level review of the notes that will soon become available. You want to focus on only the best notes and underlying collateral.

Necessary steps of initial due diligence include:

First, strip out any of the states you want to exclude.
Second, filter out any of the cities that don’t pass your criteria (e.g., low population, high vacancy rate, negative growth rate).
Third, strip out any of the properties that do not meet your minimum criteria (e.g., built before 1950, less than three beds).
Fourth, strip out any notes that don’t meet your overall strategy (e.g., payment history, UPB).
Fifth, perform any additional due diligence steps based on your comfort level.