Mortgage delinquencies have been inching up in the United States in recent months. Should this be a cause for concern?

After a string of natural disasters pounding some communities and with rising prices for insurance and property taxes putting pressure on struggling homeowners, could more homes fall into foreclosure this year?

Selma Hepp, chief economist for CoreLogic, spoke with Scotsman Guide about what’s causing the uptick in early delinquencies, where the hot spots are and why’s she’s not particularly worried.

How low are delinquencies now in relation to history?

We are at some of the lowest levels that we’ve ever been. The lowest that we’ve ever been was at some point last year, and we have been rising since, only slightly, though. We are still, comparatively speaking, at the lowest levels going back to 2019, at least.

On a national level, is there a threshold for early-stage delinquencies where you become concerned that’s going to lead to a surge in foreclosures?  

I don’t know that there’s a trigger point because we only really had one foreclosure wave, which was the 2008-2009 period. Other than that, really the foreclosures are mostly driven by local conditions. A lot of times it’s a function of rising unemployment. So, if you have an unemployment shock in an area, you’ll see a rise in delinquencies. Or, if you have a natural disaster like a hurricane or wildfire or something like that, that’s when you tend to see a rise in delinquencies.

You mentioned an uptick in delinquencies. What is causing that?

It’s mostly driven by (local factors) because when we look at the delinquency rates by metro areas, metros that haven’t seen any significant impacts are not seeing a rise in delinquencies. And then on the flip side, you have a metro in Asheville, North Carolina, that’s had the largest increase (in delinquencies), and that’s because of Hurricane Helene.

And then you’ll see some areas where you have more lower-income households that are being impacted by rising costs, overall inflation, and then inflation in insurance and property taxes. So, in some markets where those costs have gone up a lot, we’ve seen a slight uptick, but oftentimes they don’t end up in serious delinquencies or foreclosures because a lot of folks have built up equity.

Louisiana has historically been an area where we do see an elevated rate of delinquencies, and I think it’s the weak employment market. It’s also an area with persistent natural disasters year after year, you see hurricanes come through. So, as a result of that, you have, overall, just higher delinquency rates.

Going through CoreLogic’s list of cities, delinquencies vary considerably. Delinquencies were under 3% in many cities whereas some have much higher rates, such as Laredo, Texas, where early-stage delinquencies are above 9%. Is there anything else besides local employment conditions that account for the variance?  

I would say it’s local conditions. And then again, Texas is one of those areas where we’ve seen double whammy of higher insurance and higher property tax increases. In some states you have a cap on property taxes, so they don’t increase on the annual basis as much, but Texas doesn’t have the same cap. And so, property taxes have gone up a lot. And when you have a household with a fixed income, that can be pretty detrimental, so that’s another common thread that we see, particularly in Texas.

Where do you see delinquency trends heading?

It’s now coming close to the levels where we were in 2019. Part of me still thinks it’s just normalization to pre-pandemic trends. You’ll always have some natural rate of delinquency.

Modification programs have become so ingrained in servicers way of dealing with households and there is so much equity that I think that’s still the first line of defense for those folks that are struggling. And so, I don’t think it’s going to keep going up.

What is the impact of rapidly rising home insurance rates?

Most of the payment shock has already happened in many ways. Going forward you won’t see as big of a payment shock, so additional people aren’t necessarily going to fall behind, but it’s a little bit uncertain with what’s happening with insurance markets. In places like Texas, insurance is pretty well priced unlike California, where risk is not priced in well.

And so, a market where I could see there being a shock payment is California, with the pricing of insurance risk. But then California households tend to have much more equity built up and delinquency rates are pretty low in California, some of the lowest.

You mentioned mortgage forbearance programs. I imagine that acts as a check on foreclosures?

Absolutely, they are. That’s why we haven’t seen as much of an increase, or the increase has been so gradual. And the other thing is the labor market has been pretty strong.

Do you expect a spike in delinquencies and foreclosures in the Los Angeles area given the scale of the disaster there from the fires?

Well, no, not really. First of all, people have a lot of equity. And in our data we’ve seen that average loan to value. People have 60% plus in equity. So, that means even if the home is fully destroyed and they sell the lot alone, that would likely cover the remaining balance on their mortgage.

The other thing is they may have insurance, and so insurance will cover some of that, too. So, I don’t see it, and we haven’t seen that necessarily happening even in an area like Asheville (which saw heavy damage from Hurricane Helene in September). We do see increases in delinquencies immediately after a disaster as people are sort of figuring out who pays for what between insurance and FEMA and whatnot, but not a rise in foreclosures per se.

Any final thoughts on distressed properties?

I am not sure myself yet what is the right thing to watch for because dynamics have changed so much in terms of foreclosure activity (given), like we talked about, the forbearance programs and how much that’s being used as a stop gap. We’re just in a bit of a different environment because of that.

So, we may, in general, see fewer foreclosures than we’ve seen historically. And the other reason being that people have so much equity. They can just sell because they have so much equity and still walk away with some cash.