The mortgage delinquency rate dropped to 5.9% in January, dipping below 6% for the first time since March 2020, a -3.82% change month-over-month.

An improvement, to be sure — but the bigger picture is more complicated.

According to Black Knight’s First Look at January 2021 Mortgage Data, more than 2 million homeowners remain 90 or more days past due (but are not yet in foreclosure), which is a mortgage delinquency rate five times higher than pre-pandemic levels. And while foreclosure starts and sales stayed at record lows in January, that is largely because of the moratoriums that are still in place.

"At the current rate of improvement, 1.8 million mortgages will still be seriously delinquent at the end of June when foreclosure moratoriums on government-backed loans are currently slated to lift," Black Knight reported.

While some analysts have predicted a tsunami of foreclosures when the forbearance program and moratoriums expire, the data suggests that probably won’t happen. At its peak in March, more than 8% of mortgages were in the forbearance program. By the end of the year, that number had dropped to about 5.5%.

According to the Mortgage Bankers Association, from July 2020, when borrowers started exiting the program, until the end of 2020, about 87% of them did so with positive outcomes, whether it was with a repayment or loan modification plan in place, their missing payments deferred, or their loans paid off.

If that trend continues, just the other 13% of homeowners are at the biggest risk of default, which represents about 325,000 borrowers.

To put that in perspective:

In early 2020, foreclosure activity was between 0.5% and 0.6% — about 250,000 homes — which is half the normal rate of 1%. If those borrowers have been protected by the moratorium, we can expect them to go back into the pipeline when the program ends. If all 250,000 of those borrowers default, along with the 325,000 expected to exit the forbearance program without a formal plan in place, 575,000 loans would then be in foreclosure — a rate of 1.15%, just barely above the historic average.

Of course, that’s all just conjecture. Despite the dip in the mortgage delinquency rate, it seems unlikely that there wouldn’t be a significant spike in foreclosures after a pandemic that put 40 million Americans out of work.

Either way, default servicing providers should prepare for an increase in default activity and ensure they have the resources in place to handle the surge of borrower contacts.

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