Andy Walden on why improved equity positions won’t impede foreclosure starts

Alcynna Lloyd: Hello Housing Wire listeners. Today I’m joined by Andy Walden, an economist and vice president of market research for Black Knight Data & Analytics. Thank you for joining us again on Housing Wire Daily.

Andy Walden: Hello, and thank you for having me.

Alcynna Lloyd: Of course. So, listeners, Andy has joined us to discuss Black Knight’s most recent mortgage monitor report that indicates homeowner equity alone will not be enough to prevent foreclosure starts. This report was interesting to me because there’s long been speculation on whether or not the housing market would face a wave of foreclosure starts following the end to forbearance moratoriums. Black Knight seems to confirm this as its data shows that, although improved equity positions among forbearance participants were reported last month, it will likely not provide a blanket backstop against foreclosure actions. Black Knight highlights that roughly 30% of those who could sell to avoid involuntary liquidation do not seem to be doing so.

Andy, what factors could be driving these borrowers towards foreclosure, and what is preventing them from selling to avoid eviction?

Andy Walden: Absolutely, and I think some of the reasons that are driving these homeowners to foreclosure are exactly what we would think, right? The broader economic conditions out here, which are leading to higher than average unemployment rates and have caused borrowers to become delinquent. When we start to look at the underlying data, and specifically historical data on borrowers that have been referred to foreclosure, and what those results have been by equity position, I think a couple of things stand out to me there. One is that borrowers aren’t performing as you would expect them to. Those borrowers that have higher equity positions, you’re seeing more of those borrowers referred to foreclosure. They suggest that maybe they’re not aware of the equity positions they’re in, or maybe that the fact that they’re in foreclosure in and of itself is maybe a little bit scary, embarrassing, and maybe they’re just not able to ask the questions that they need to. Right?

So, I think there’s an opportunity out there for the market as a whole to educate those homeowner on their equity positions, to educate them on the foreclosure process in the sale of a home to help those buyers that could potentially avoid foreclosure avoid that process.

Alcynna Lloyd: Right. So, it seems that education is a big deterrence to them being able to organize their auctions.

Andy Walden: Absolutely, yeah.

Alcynna Lloyd: So, I want to continue on our previous question by discussing a quote by Black Knight’s president Ben Graboske that claims the healthy storage of equity in the hands of homeowners currently in forbearance may not be sufficient on its own to ward off foreclosure activity. According to him, during the early stages of the Great Recession, borrowers with limited equity were much more likely to be referred to foreclosure than those with strong equity positions. However, foreclosure start rates on homeowners who were 120 or more days past due have been relatively similar regardless of equity stakes from 2010 and on. The borrowers in the strongest position is only slightly less likely to be referred to foreclosure. So, he claims, 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.

You would think our current market defers greatly from that of the Great Recession, but why do risks of foreclosures still remain almost as strong regardless of a borrower’s equity position today?

Andy Walden: Yeah, I think our market does certainly vary greatly from the Great Recession. I think you see that now. I think we’re going to continue to see that play out, not only in the equity positions, but post forbearance performance, the impacts on the housing market, and on down the line, but I certainly think we’re going to have a very different view and outcome than what we saw during the Great Recession, but when you look at foreclosure referral activity, specifically, it’s really the last resort for servicers when borrowers aren’t able to return to making mortgage payments. And so, regardless of equity position, whether a borrower has strong equity, or maybe is underwater on their mortgage, it’s still the last resort, regardless. Right? So you still see a similar number of loans being referred into the foreclosure process, regardless of what that underlying equity position is.

Alcynna Lloyd: All right, so I want to take some time to highlight some more data. According to Black Knight, the research shows that just 7% of homeowners in forbearance have less than 10% equity, even after rolling 18 months of deferred payments into their total debt amounts. The risk for foreclosure activity and ultimately distressed liquidations hasn’t gone away. Andy, looking back, did forbearance moratoriums benefit these borrowers financial situations, or did it only cause the unavoidable?

Andy Walden: I think when you look at the overall numbers, I think it undoubtedly helped homeowners, right? Um, when we can see that there are still 1.6 million homeowners that still remain in forbearance. But if we take a broader look at what’s happened over the last 18 months, we’ve had 7.6 million homeowners that have been in forbearance plans over that time. Nearly 80% of those borrowers have left those forbearance plans early. Over 70% of those borrowers are reperforming on their mortgages, or have paid off their mortgages in full. So, I mean, when you kind of look at that broader landscape of what the potential issues could have been in the housing market, what we’re actually seeing play out right now, I think we’ve avoided a lot of pain, a lot of potential foreclosure activity with these forbearance plans and foreclosure moratoriums.

Alcynna Lloyd: Right. I know we’ve seen a mixture of commentary regarding that. Some say, “Yes, we did.” And some say, “No,” so I was really interested in seeing what Black Knight thought, and what you, specifically, thought as well.

Andy Walden: Yeah. I mean, and when you look more broadly, if we look at the number of borrowers that became 90 days delinquent last year, we saw the largest number that we’ve seen in 10 years, and the result, I mean, if you look at foreclosure activity, foreclosure referrals are down 80%. Active foreclosure cases across the country hit a record low. So we really avoided a lot of potential snowball effect in the mortgage market by really putting a stop to some of these potential foreclosures early on and helping the borrowers get tp get back on track in terms of making mortgage payments.

Alcynna Lloyd: Now, see, that’s really good. And so, so now I want to take this time to focus on our current housing market. So I’m going to report Black Knight also claims the nation’s white-hot housing market has begun to show signs of slight cooling as annual home price appreciation slowed from the all-time high of 19.4% in July to 19% in August, marking the first decline in the rate of annual appreciation in 15 months, with daily tracking data for September suggesting further cooling is on its way. What is causing this cooling, and will this ultimately benefit borrowers or those entering the market?

Andy Walden: Yeah, I mean, I think there are a few different factors that are causing cooling of the housing market. Really, some of those things that had been a big tailwind for the housing market over the last 18 months are kind of shifting and becoming slight headwinds to some degree. Right? We have interest rates that have been at all-time lows that are starting to tick up. There are some questions here, over the next few months, as the Fed begins to step back from those accomodative policies to really understand what that means for 30 year rates, and how they could affect the overall market.

You certainly have inventories that are starting to turn the corner a little bit. We still have the vast majority of markets that are really short on inventory out there, but we’re not as short as we were a couple of months ago. So you have that kind of transitioning as well, and obviously, affordability, right, with the 25% home price growth that we’ve seen since the onset of the pandemic. You’re really starting to see that affordability picture tighten up, and that could continue to be the case going forward as well. So again, a lot of those things that have kind of been pushing us forward are going to start to kind of slow down that market, along with just the typical seasonality that you see from September to January as well.

In terms of the impacts on how that could ultimately benefit homeowners, well it could reduce some of the bidding war activity. We’ve seen, obviously, red-hot bidding activity throughout the summer months. Well, it could reduce that, so you may not be facing 10 offers, you may be facing one or two. The prices that homeowners are going to be paying, their out of pocket expenses, because of rising home prices, alongside rising interest rates, are still going to be much, much higher than they were 9, 12, 18 months ago. Right? So, you’re facing a little bit less competition, but you’re still facing those prices that have really gone up here, in the market, over the last year and a half.

Alcynna Lloyd: Yeah, and that all ties back to a lack of inventory, which is everybody’s concern. We can’t talk about affordability without talking about our significant lack of housing inventory.

Andy Walden: Absolutely.

Alcynna Lloyd: So, well, today, before we wrap up, is there anything else you think our audience needs to know about mortgages, homeowner equity, or foreclosure starts. These are all hot topics right now, so I’m sure our audience would love to know more.

Andy Walden: Yeah, I mean, I think there’s going to be a lot of different things that are playing out here in the next three to six months that really cold kind of shift what the landscape looks like as we move throughout 2022. One of them is the interest rates that we just talked about. The Fed is starting to talk about walking back some of those accommodative policies. Obviously, that has downstream implications on the housing market. I think a lot of folks underestimate how much interest rate impacts home prices and home price growth. And so, if you see a sharp rise in interest rates that’s not going to fall on the long side by rising incomes, that could noticeably impact affordability, especially in some of those coastal markets that have been very, very hot.

And then, alongside that, I mean, we’ve been talking about this as well, but forbearance plans expiration. We still have 1.5 million homeowner who are in forbearance plans. The majority of those are going to begin to expire here over the next few months. That will impact not only foreclosure referral activity, especially when we get into early 2022, but that potentially could have downstream impacts into the housing market as well. If you start to see distressed inventory hit the market, or you start to see homeowners list some of those homes that are coming out of forbearance in the traditional market. That could impact that inventory landscape that we’ve been talking about as well. So, a lot of movement here over the next three to six months, both in the mortgage market and in the housing market.

Alcynna Lloyd: Well, I’m sure we’ll have you back on again to discuss these movements. We love to have your commentary and the data that Black Knight provides.

Andy Walden: Absolutely. Thank you for having me.

Alcynna Lloyd: Of course. Thank you so much for joining us on Housing Wire Daily. I’ll see you back here tomorrow for Housing Wire’s Women of Influence series. Thank you, and we’ll see you then.