In what became known as the “foreclosure crisis,” which included the burst of the housing bubble, foreclosures, and the drop in the value of mortgage-backed securities, foreclosure rates peaked in 2010. But since that time, the number of foreclosures in the US has steadily declined. The foreclosure crisis has taught both lenders and homeowners a lot, and it also led to the creation of a regulated mortgage market that prevents the growth of a subprime mortgage market.
Foreclosures are anticipated to remain relatively low in 2023 due to a low supply of homes for sale nationwide. The high equity among American homeowners is a significant factor currently assisting homeowners to avoid foreclosure. In the second quarter of 2022, CoreLogic reported that the average equity per borrower was close to $300,000. It is much simpler for homeowners to sell their home and still make a profit above what they owe the lender if they find themselves in an unexpectedly difficult financial situation. Since 1996, Attom Data has been compiling information on foreclosures. And according to them, there is good news:
“There’s virtually no chance we’re going to see that kind of foreclosure activity again. Before the pandemic, foreclosure activity was running a little low compared to historical numbers. That was largely because of changes in lending practices that were put in place back in 2010...”
– Rick Sharga, Executive Vice President for MarketIntelligence for Attom Data
As per Sharga, these modifications have made borrowers significantly more qualified than they were in the past. Additionally, loan performance has been exceptionally strong, which has led to a decrease in foreclosure activity from the typical 1% level of about 550,000 loans (predicated on 55 million U.S. mortgages) to approximately 250,000 loans. The majority of borrowers who are currently facing foreclosure—93%—have positive equity in their properties.
When we were in 2008, one-third of all borrowers were underwater, this was the exact opposite situation. Although the number of foreclosure starts is rising, there aren’t many bank repossessions at the moment. These troubled borrowers are (instead) implementing a soft landing. They are figuring out a way to profitably sell their house even before foreclosure auction and start anew.
The Bottom Line:
At least through mid-2023, foreclosure rates are anticipated to stay below pre-pandemic levels. For starters, compared to interest rates of about 3% from a year or so ago, mortgage interest rates have increased to about 7%. Potential homebuyers are typically discouraged by higher interest rates because they would have to make larger monthly payments if they were to purchase a home. Many people choose not to purchase a home as rising mortgage payments are a result of high interest rates. The likelihood of foreclosure typically does not increase when people stop getting mortgages to buy homes. Furthermore, a lot of current homeowners have low, fixed-rate mortgages, which means they have manageable monthly payments and a lot of equity in their homes. As a result, the United States should prevent a wave of foreclosures.
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