Serious delinquencies resume their decline, but at a more gradual pace

Long-term delinquencies re-established a downward trend in July, but they aren't curing as quickly as they were, according to Black Knight's latest report.

Loans that were 90 days late but not in active foreclosure during July decreased by 5,000 from June and 853,000 a year earlier to 594,000. However, at 58,000, cures from that status — defined as any circumstance in which delinquent loans were recategorized as current — have been almost halved since March. Also, the overall national delinquency rate did rise slightly to 2.89% from 2.84% in June.

Despite this increase in the total delinquency rate and diminished cures for serious arrears, multiple indicators of foreclosure activity were lower on a consecutive-month basis. At 17,700, starts were down 25% from the previous month, and loans in pre-sale foreclosure inventory totaled 184,000 during July, marking a 6,000 decline from June. Although the pre-sale foreclosure inventory rate is up 44,000 from a year earlier, it's 55% below pre-pandemic levels.

These statistics add to signs that distressed loan specialists are facing a need to expend more of their energies on a growing number of borrowers who may be unable to cure as their forbearance plans end.

"People that rolled off of forbearance, they tried to get permanent loan mods. Many couldn't meet the trial payments and are falling off. Now the servicers are looking at what is that all going to mean?" Jane Mason, founder and CEO of servicing technology vendor Clarifire, said in an interview.

While overall loan performance remains relatively healthy, with the overall delinquency rate just 14 basis points above its record low, it does seem to be getting tougher to bring mortgages that have been in arrears current, Black Knight researchers said. (While new student loan relief the Biden administration announced Wednesday could improve some mortgage-borrowers' finances, at deadline it looked unlikely to immediately improve the overall performance outlook for home loans.)

"We've now seen serious [mortgage] delinquencies improve in 22 of the past 23 months. That said, the rate of improvement has slowed in recent months suggesting that the easiest workouts have been completed, with more difficult wood to chop ahead," said Andy Walden, vice president of enterprise research and strategy at Black Knight, in an email.

Adding to that challenge in July were prepayment numbers that suggested a persistent lack of opportunities to refinance into lower-cost loans. At just 0.66%, the prepayment rate for the month was down 1.35% from the previous month and 76.35% from a year earlier.

"Modest interest rate declines in recent weeks haven't resulted in any material rebound in refinance volumes," Walden said. "Even with 30-year rates at 5.13% last week, fewer than 2% of mortgage holders were in the money to refinance."

Mortgage rates at the time of this writing also had resumed an upward trend, putting more downward pressure on refinancing; and weak purchase market activity additionally has contributed to low prepayment rates, he added.

"Housing turnover — which now drives two-thirds of all prepayment activity — continues to face downward pressure from historically tight affordability, traditional seasonality and, of course, the current rate environment," Walden said. "July rate locks (which will turn into August/September purchase closings) were down 14% from the prior month and 22% from the same time last year, and have continued to trend sharply lower through early August."