Separate data from the U.S. Department of Housing and Urban Development (HUD) shows a similar trend for mortgages insured by the Federal Housing Administration (FHA). More than 30,000 seriously delinquent FHA-insured mortgages either failed or were ineligible for post-forbearance loss mitigation in July 2022. That was more than double the number in the previous month and more than double that of a year ago. “You’ve already got an overlev- eraged buyer going into (an FHA) loan, compared to conventional. You’re starting off with a riskier borrower to start with,” said Lee Kearney, a Tampa-based real estate investor. “I have no doubt that the floodgates are going to open up on the post-pandemic defaults.” 12-MONTH FORECAST If the pandemic backlog of distress can be estimated at about 420,000 delinquent loans, the next question becomes how much of that backlog will eventually reach the housing market in the form of a distressed sale—either foreclosure auction sale or bank-owned (REO) sale. An Auction.com survey of more than 50 senior-level representatives of major mortgage servicers in June 2022 sheds some light on this question. On average, those surveyed estimated that 23% of their company’s seriously delinquent mortgages would complete the foreclosure process in the next 12 months. That is close to the historical rate of 25% based on data from Black Knight and ATTOM Data Solutions going back to 2006. Applying the 23% rate to the 420,000 backlog of unprotected distress results in about 96,000 completed foreclosure auctions between July 2022 and June 2023. That 96,000 would represent a 43%
increase compared to the roughly 67,000 completed foreclosures in the previous 12 months, between July 2021 and June 2022. That is, of course, not accounting for any “business as usual” foreclosures not flowing from the pandemic backlog.
August 2022 foreclosure starts were at or above the pre-pandemic levels of January 2022 in 17 states, including Florida, Texas, New York, Michigan, and South Carolina, according to the ATTOM Data. SLOWING RISING TIDE OF FORECLOSURES That growing backlog of unprotected foreclosures is slowly making its way to foreclosure auction, as evidenced by proprietary data from Auction.com, which accounts for close to half of all foreclosure auctions nationwide. According to the Auction.com data, completed foreclosures in August 2022 were up 1% from the previous month and up 63% from a year ago, the 17th consecutive month with a double-digit year-over-year increase. Despite the string of double-digit increases, completed foreclosures in August 2022 were still at just 45% of the pre-pandemic level of January 2020, reflecting what has been a gradual increase in
LOOSENING LOGJAM OF DISTRESS
Increasing foreclosure starts in recent months indicate the logjam of pandemic-deferred distress is beginning to loosen. Nearly 24,000 properties started the foreclosure process in August 2022, according to ATTOM Data Solutions. That was up 12% from the previous month and up 187% from a year earlier, the eighth consecutive month with a triple-digit percentage gain. August 2022 foreclosure starts were still 9% below the pre-pandemic level of more than 26,000 in January 2020, but the August numbers marked a new pandemic high. Foreclosure starts are returning more quickly in some markets.
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