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Welcome back to the RCN Capital market update with our resident expert, Rick Sharga. We’re diving deep into the foreclosure market, as Chairman Powell's recent testimony made some waves. In a fortuitous turn, Powell's schedule synced up with ours, giving us a golden opportunity to discuss the state of the foreclosure market post-Powell's testimony.
Forbearance Program: A Successful Government Initiative
First on the agenda is the forbearance program, a government initiative designed to help individuals struggling with their mortgage payments due to the COVID-19 pandemic. In the 25 years that Rick has been involved in the real estate and mortgage industries, this is perhaps the best example he's seen of a successful collaboration between the mortgage industry and the government.
The program initially allowed individuals a forbearance of three to six months, which, for many, turned into a nearly two-year hiatus from mortgage payments. More than 8.5 million borrowers took advantage of the program, with only around 240,000 remaining as of yesterday. A surprising finding is that approximately 15% of borrowers who are in the program today have managed to maintain their loan status current, continuing to make their monthly payments while having the safety net of the forbearance program.
The success of the program becomes evident when you look at the exit data. Almost 30% of borrowers remained either remained current on their loans during the program or had their loans fully re-instated, while another 7% paid off their loans completely. This means that over 35% of borrowers had a positive exit from the program. The remaining participants either entered into loan modification or payment deferral programs (45%), or left the program without a clear plan (18%).
Mortgage Delinquency and Foreclosure Market
We also want to discuss mortgage delinquency rates and actual foreclosure activity. When asked if there's complacency in the foreclosure market due to forbearance programs and other measures, Rick would argue that the sentiment is more of frustration than complacency. Servicers are finding a change in borrower behavior, with borrowers seeking out loan modification as soon as they receive a foreclosure notice, rather than going into hiding as they did in the past.
This shift in behavior, while positive in terms of borrower engagement, means some delays for properties that will inevitably still end up in foreclosure. But lenders are treading carefully, wary of potential penalties from the Consumer Financial Protection Bureau (CFPB) for mistakenly initiating foreclosure.
The Future of Mortgage Rates
In response to a question about the potential narrowing of spreads in the 30-year fixed-rate mortgage space, Rick predicts this will happen later in 2023 once the Federal Reserve slows down on rate increases. The spread between the 10-year U.S. Treasury bond yield and mortgage rates (historically around 1.5 to 2 points) is currently about 3 points. With reduced volatility, we could see mortgage rates falling back into the 5% range by the end of the year if the Fed limits further rate hikes.
As always, it's a pleasure to provide you with these insights. We'll be back in a couple of weeks with more updates. Until then, stay informed and make it a great day!