Exchange: the way forward
This piece originally appeared in the April 2022 edition of DS News magazine, online now.
Prior to joining the Fed in 2007, Larry Cordell worked in mortgages at Radian Group and Freddie Mac. Upon joining the Fed, Cordell served as a special advisor during the financial crisis and focused on several key Federal Reserve system initiatives, including the conservatorship of Fannie Mae and Freddie Mac, the supervisory capital assessment program ( SCAP) and comprehensive capital analysis and review. (CCAR).
Cordell is now the senior vice president of the Risk Assessment, Data Analytics and Research (RADAR) group, which he launched after the financial crisis and helped grow it from two people to more than 50. His team has developed key capabilities, including hosting the most comprehensive collection of securities and consumer credit data in U.S. markets, building surveillance and research capabilities in supervision, and estimating loss patterns. under Dodd-Frank Act Stress Testing (DFAST).
Cordell’s research covers all aspects of consumer credit, loss modeling and fixed income securities. He was also an adjunct professor in Penn State’s Masters in Finance program, teaching a course on fixed income securities. He has a doctorate. in Economics from the University of North Carolina at Chapel Hill and an undergraduate degree from St. Louis University.
After spending a decade focusing on mortgages and mortgage-backed securities as a professor and consultant, Xudong (Sean) An swapped titles from Full Professor of Finance and Endowed Professor of Real Estate to University of State of San Diego for an economist position at the Bank. . He is now interested in consumer credit, banking and risk management, and he has shared his research in academic journals such as the Journal of Financial Economics, Journal of Policy Analysis and Management and Review of Finance .
An has a doctorate. from the University of Southern California. He is an elected member of the Homer Hoyt Institute and currently serves on the editorial board of Real Estate Economics and the Journal of Real Estate Finance and Economics.
Cordell and An spoke with DS News on recent housing market trends and specifically data covered by the Philadelphia Fed”Review of forbearance and mortgage default resolution», report published in January 2022.
To start, could you tell me some of the key takeaways from your recent analysis of Black Knight data on mortgage forbearances and defaults?
Cordel: Forbearance report says you’re down to around 700,000 [in forbearance]. From our aggregate numbers, that’s a big drop, because at one point or another, over that whole period, about 8.4 million mortgages were in some stage of forbearance. Some of them, of course, were still performing. We are only at about 700,000 borrowers still in abstention. Nearly one million borrowers have emerged from forbearance but are seriously delinquent. While a million sounds like a lot, about half of them are in some stage of loss mitigation, and about half of them are from loss mitigation.
So these are loans that are likely to be referred to foreclosure. This, in itself, is not high. We’re talking about 2% of mortgages in the entire industry of about 53 million mortgages. It’s a very small percentage. So we’re not talking about something that’s going to create some kind of systemic problem in the mortgage market or anything like that. The good news is that, of borrowers who are seriously in default and not in forbearance or who are out of forbearance but are seriously delinquent, we estimate that around three-quarters of they have substantial equity in the property. By substantial equity, we mean 20% or more equity in their home. So that’s obviously a huge difference from what it was during the Great Recession, when most borrowers were underwater.
There are two caveats to this. The first is that, out of about half a million borrowers who are in some stage of loss mitigation, nearly three-quarters of them are still in default on their mortgage. They are in a transitional state.
The other caveat is that this subset tends to be dominated by minority and low-income borrowers. We were able to take these mortgages and merge them with data from the Home Mortgage Disclosure Act, which contains the race and income of borrowers when applying for the loan. What we show is that nearly 8% of black borrowers are either in forbearance or out of forbearance and still in default. So that’s a pretty high number. And about 5.5% of Hispanic borrowers are, compared to about 3.5% for whites and about 2.5% for Asian Americans.
Were there any surprises regarding the rate at which you saw people coming out of forbearance or did it go as planned?
A: Thinking about the big picture, there were two surprises to all of this at the start of the pandemic. There was great concern that the mortgage market and the housing market were going to have major difficulties. But the housing market remained very strong. We’re seeing a lot of house price appreciation, and you might call that a surprise. Another is the number of borrowers who were able to get temporary relief through forbearance and then get back on track by reproducing or training.
Is this distribution of equity distributed equally between, for example, minority cohorts or geographic regions?
Cordel: That’s an excellent question. We didn’t necessarily find it distributed inequitably along racial dimensions, but it’s clear that the equity situation is going to be worse for FHA/VA borrowers because they’re just starting out with less equity to begin with. . Also, for some of the low income borrowers, we are seeing less equity in their home, which is also related to the fact that they might have FHA/VA mortgages.
What do you expect for foreclosure rates in the future?
Cordel: One thing that surprised us at first is that even though the foreclosure moratorium ended in July, foreclosure starts haven’t really picked up. Now, that was partly because the CFPB added additional protections for borrowers. But they remained very low until January. In February, the numbers increased. Now the number of foreclosure referrals has increased to pre-pandemic levels. Thus, we estimate that approximately 56,000 mortgages were foreclosed between January and February 7.
So until December, which is before those protections expired, we were processing about 7,000 to 8,000 foreclosure referrals per month, which is well below the standard pre-pandemic rate of about 50,000. In the month of January, we saw about 56,000 foreclosure referrals. Clearly, there was a backlog of foreclosures because for almost two years foreclosure referrals were down. So we’re going to see a recovery, but we’re not going to see a recovery close to what it was in 2007-09. If they get back to pre-pandemic levels, we’ll have a pace of about 50,000 per month, and that’s about where we are right now. There is a backlog, so it’s hard to predict exactly what will happen, but over time, as this finally stabilizes, we’ll get back to a normal dismissal process.
Can you tell from the data what percentage of those housing starts are cases that were due to foreclosure before the pandemic, as opposed to borrowers suffering economic fallout in the past two years?
Cordel: This is another excellent question. I don’t have the exact numbers, but I will make an observation that surprised us a bit. For bank portfolios and private label mortgages that are seriously delinquent today and not in loss mitigation, about 85% were created before the Great Recession. Many of these borrowers have already been modified. Options are more limited for these borrowers. These represent about half of seriously delinquent borrowers who do not abstain.
For the other half of severely delinquent borrowers who follow a loss mitigation plan, we see a greater mix of more recent origins. The caveat for these borrowers is that around three-quarters have yet to resume paying their mortgage. It’s still early days, as many have recently come out of forbearance, so we need to follow these borrowers closely to see if they are getting back on track.
How are potential backlogs in foreclosure states likely to impact these numbers in the future, if any?
Cordel: We did not see a dominance of delinquent mortgages in foreclosure states where foreclosure times are much longer. However, at the same time, managers governed by CFPB regulations are still trying to work with borrowers. So I don’t think we’re necessarily going to see this huge flood of foreclosures happening early on. These will subside over time.
We are in a very vigorous real estate market. Many borrowers have enough equity in their homes to avoid foreclosure, and there is huge demand for homes on the market. This will help the most in avoiding foreclosure.
A: I agree with you. This time the backlog in our base system is not a major concern. As Larry explained earlier, we’ll likely be back to pre-pandemic lockdown levels, maybe a bit higher given some of the backlog, but it won’t be like the years of the Great Recession. Just to put things in perspective, according to a conservative estimate, half a million loans could be foreclosed. But during the Great Recession, there were four to five million foreclosures. It’s not on the same scale. The judicial backlog is therefore not a major concern today.