Rising Mortgage Delinquencies to Show Up in 2021

The refinance boom is edging toward its third birthday, but like all good parties, it will be coming to an end.

Mike Fratantoni, chief economist for the Mortgage Bankers Association, said Thursday that this year will close with record profitability for mortgage lenders despite the effects of the COVID-19 pandemic on other sectors of the economy and mortgage delinquency rates that are already rising.

However, next year they will find their margins compressed as rising rates constrict the flow of applications and rising delinquencies boost costs.

“It’s just so much more expensive to serve a delinquent loan than a performing loan,” said Fratantoni, the guest speaker at a webinar sponsored by Origence, a division of CU Direct of Irvine, Calif.

Bank and credit union balance sheets have shown delinquency rates have fallen since the pandemic. Economists have guessed that the numbers are skewed by loans in forbearance or other accommodations.

In a webinar Thursday sponsored by Experian, analysts cited evidence of off-book delinquencies, especially in mortgages, and to a lesser extent in auto loans.

“I feel there are a lot of shadow delinquencies,” Keith Weitz, vice president of quantitative solutions at Experian, said.

In CUNA Mutual Group’s Credit Union Trends report released Friday, chief economist Steven Rick said he expects credit union delinquencies broadly to rise in the fourth quarter and charge-offs to rise in the first quarter.

Fratantoni’s predictions are based on a deep data set from servicers maintained by the Washington, D.C.-based trade group. He compared the number of mortgages where no payments were present for at least one month to the total number of mortgages in the pool.

The data disregarded forbearances or other accommodations. Loans with payments are counted as current; loans without payments for at least 30 days are counted as delinquent.

“This is a servicer-focused study: Did the cash arrive or not/?,” he said.

Fratantoni said delinquencies at the end of 2019 were at their lowest level since 1979. That turned around quickly with the pandemic and spike in unemployment.

For all mortgages, the delinquency rate at the end of September was 7.6%, down from about 8% in June. That compared with a range of about 4% to 6% from 2014 to March 2020, a Great Recession peak above 10% in 2009 and 2010.

FHA loan delinquencies leaped to 15.6% by Sept. 30 — its highest rate since at least 1979. The rate had fluctuated between 8% and 10% from 2014 through March 2020, and its peak during the Great Recession was between 14% and 15%.

Separately, MBA has been tracking forbearances among about 50 servicers weekly. The percentage of mortgages in forbearance rose sharply in April, and peaked at 8% in June. As of early November, the rate was 5.5%, representing 2.7 million households.

“The Ginnie Mae, FHA and VA have been a little more stickier coming down,” Fratantoni said. “These are folks who are much more likely to have been working in that leisure and hospitality space, in travel, or some of these sectors of the economy that have been hit so hard.”

MBA’s Nov. 16 estimates showed refinance originations were $552 billion in the three months ending Sept. 30, double the volume a year earlier. The third quarter was much better than the 63% third-quarter increase MBA had estimated a month ago. However, it said it expects refinances to start slowing this quarter, and fall 54% in 2021’s second quarter.

Purchase originations rose 9.3% to $410 billion in the third quarter. It said it expects a steep increase through spring 2021 with volume rising 29% this quarter and 38% in the first quarter.

Lenders can blame the increase in purchase originations in part on 28- and 29-year-olds. They are an out-sized demographic blip just a year or two away from prime time for first-time home buyers.

“As that cohort comes forward, we’ll see an incredible increase in housing demand,” Fratantoni said.

With demographics shipping a large quantity of demand, it will be up to home builders to help close the gap on supply.

Existing homes “are just flying off the shelves,” and the supply of homes on the market remains tight.

“At some point, we’re just going to run out of homes for people to buy.”