Serious delinquency rates by at least one measure have
That's in part because interest rate-related developments have created an environment where more mortgage firms are interested in selling, according to Pamela Hamrick, president of Incenter Due Diligence.
"What's happening a fair amount in the marketplace is there are small- to medium-sized originators that had been holding onto servicing for the last several years and because volumes have been down so much there, a lot of organizations are looking for ways to increase their capital position," Hamrick said.
Distressed assets tend to be most cost-intensive so mortgage companies tend to shed them first, and while delinquency rates have been low for a while, housing finance firms may have older servicing with issues. Some may have new distressed loans from expiring pandemic relief.
In line with typical market trends, certain products like loans that the Federal Housing Administration back have higher delinquency rates relative to other products and generate more distressed servicing, Hamrick noted.
And while most mortgage delinquencies are still below more normalized levels seen prior to the pandemic, VA loans (prior to the institution of
That said, their delinquency rate historically tends to be lower than FHA loans and has been declining, so it could drop back below pre-pandemic levels, said Archana Pradham, an economist at CoreLogic.
"My guess is it will come down a little and at 2%, it is still pretty healthy," Pradham said, referring to the current delinquency rate for VA home loans.
Meanwhile, investors also have become more eager to buy because interest rates, which can complicate pricing if they shift before a deal settles, have become less volatile, Hamrick said. Less predictable rates last year deterred a lot of investors, she noted.
"I think a lot of them have been sitting on the sidelines just waiting for things to kind of even out a little bit," Hamrick said.
The question for investors then becomes what distressed servicing is worth, with prepayment rates, collateral values and
"Property taxes are going up, homeowners insurance is going up and flood insurance is going up. So it's not just the interest rate and the home price effect but it's also those other costs of owning a home that are impacting borrowers," Mike Frantantoni, chief economist at the Mortgage Bankers Association, said during a Snapdocs webinar on the 2024 outlook Tuesday.
Assumptions may be one way to resolve a distressed loan without having to go to a foreclosure which may be why they're gaining more traction in that market, particularly if they're VA guaranteed. (Conventional loans generally are not assumable.)
"There's an interesting dynamic that's a little more limited to VA loans right now, which is that VA loans are assumable. Many FHA loans are assumable also, but under different terms, and so servicers are active in the assumption market right now," Hamrick said.
But that's not to say there's a way to make everything in the distressed market saleable right now.
"We've seen some things that are really tough to move," Hamrick said.
Investors are particularly wary of compliance issues and other conditions that could affect the foreclosure timeline.
"If a loan wasn't originated correctly, it could really just drag out in court as a result. Then you may end up having to hold on to that property for a lot longer than you would ordinarily want to," Hamrick said.
