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Residential Department: DataDecoded: December 2017

 

DataDecoded

Risk is slowly returning to the mortgage market

r_2017-12_datadecoded_chartU.S. foreclosure activity dropped to a more than 11-year low in third-quarter 2017, but a fissure of risk showed up in some of the more arcane data that points to an emerging longer-term trend.

Attom Data Solutions’ Q3 2017 U.S. Foreclosure Activity Report noted that the overall U.S. foreclosure rate on loans originated in 2014 was the highest of any loan vintage going back to 2010. Digging further into the data, Attom found that an elevated foreclosure rate on Federal Housing Administration (FHA) loans originated in 2014 was the main culprit behind the jump in the overall foreclosure rate for all loans originated that year.

The foreclosure rate on FHA loans originated in 2014 was the highest for any FHA loan vintage since 2009. Although FHA loans originated between 2004 to 2008 continue to post foreclosure rates above the long-term historic average, they represent a shrinking share of overall foreclosure activity. At the end of September 2017, those bubble-era loan vintages represented 50 percent of all active foreclosures, down from 55 percent a year earlier and down from 60 percent two years ago.

This trend is particularly pronounced in some of the nation’s hottest housing markets, such as Austin, Texas, where bubble-era FHA loans as of September 2017 accounted for 32 percent of all active foreclosures; Denver, Colorado, 37 percent; and Nashville, Tennessee, 37 percent. In all three of those markets, however, foreclosure starts increased on a year-over-year basis in third-quarter 2017, counter to the national trend.

During that period, Austin foreclosure starts increased 29 percent. Denver foreclosure starts were up 12 percent. Nashville foreclosure starts jumped 17 percent.

It’s important to note that foreclosure activity in all three of these red-hot housing markets continues to register well below the prerecession average, despite the recent increases. Still, the jump in foreclosure starts in these three markets cannot be blamed on a big backlog of legacy loans left over from the last housing downturn.

Instead, the data suggests that this uptick in foreclosure starts is coming from more recent loan vintages, namely FHA loans originated in 2014. Foreclosure rates on 2014 vintage FHA loans were at an 11-year high in Austin and Denver, and at a 10-year high in Nashville.

Overall FHA loan originations dipped significantly in 2014 — from nearly 1.2 million in 2013 to 909,000 in 2014, a 23 percent drop. There were some notable exceptions to that trend, however, particularly among nonbanks, Attom Data research shows.

The jump in foreclosure rates on 2014 vintage FHA loans is a sign that the mortgage industry is allowing some measure of risk back into lending, albeit with extreme caution. Foreclosure rates on 2015 and 2016 vintage FHA loans are still below the historic average, but it’s likely those have not aged enough to reliably predict their long-term performance. Given that the FHA insurance premium was lowered at the beginning of 2015 to encourage broader borrower access, we would expect to see somewhat elevated foreclosure rates on 2015 and 2016 vintage loans as those loans age.

Trends in average loan-to-value (LTV) ratios on FHA purchase loans by vintage bear out this gradual movement toward more risk as well. Nationwide, the average LTV for FHA purchase loans originated in 2014 was 98.2 percent, up from an average LTV of 97.9 percent for FHA purchase loans originated in 2013. Similar upward trends in average LTV for FHA purchase loans were seen with a number of nonbank lenders as well.

Some argue that a bit more additional risk is just what the housing market needs to help provide a boost for first-time homebuyers and other low-downpayment buyers in a competitive market that favors investors who are taking advantage of more creative financing in the non-owner-occupied lending space.

Be careful what you wish for.


 

Daren Blomquist is senior vice president at Attom Data Solutions. With Attom Data Solutions since 2001, he is the company’s primary media spokesperson and an expert on the housing market. Blomquist is executive editor of the company’s award-winning Housing News Report and creates comprehensive real estate reports cited by thousands of media outlets and referenced by numerous entities, from local real estate investment clubs to multinational corporations, universities and federal, state and local government agencies. Reach him at daren.blomquist@attomdata.com.

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