You Can Thank the Labor Market for the Major Drop in Foreclosures
First-time foreclosure starts — the first part of the process that can lead to a consumer losing their home — are at their lowest level since 2000, according to Black Knight Financial Services.
There were 77,657 first-time foreclosure starts in the second quarter of this year, 25 percent fewer than the second quarter of last year, according to Black Knight.
The major drop in foreclosures can be tied to a number of economic factors, but the major reason is the jobs market, according to Orawin Velz, an economist at Fannie Mae.
Velz says one of the most common reasons people fall behind on mortgage payments is unemployment.
“If you lose your job, it doesn’t take much to stop paying your mortgage,” she says.
Trigger events like an illness can also factor in to those situations. During the last recession, there was an increase in the unemployment rate, which contributed to rising foreclosure rates, she says.
“Now, we’re in the opposite stage,” she says. “The labor market has been healing, and the unemployment rate has been declining.”
Stronger Jobs Market
The national unemployment rate was 4.9 percent in July, the Labor Department says, compared to its peak during the recession of 10 percent in October 2009.
A chart showing foreclosure starts and the unemployment rate from 1995 to the present shows a “very close correlation” in their movements, Velz says.
While nationally, the foreclosure picture is improving, there are states of the U.S. that are seeing an increase in foreclosure rates in the past six months, such as Alaska, Wyoming, and North Dakota, according to Black Knight, which points to “oil and gas woes” impacting mortgage performance. Oil prices have recently hovered near $40 a barrel, far from their peak in June 2014 of around $115.
The national drop in foreclosure starts shown in Black Knight’s second quarter data is in line with other sources studying mortgages.
The Mortgage Bankers Association (MBA) also reported foreclosure starts were at their lowest since 2000 during the first quarter: the percentage of loans on which foreclosure actions were started was 0.35 percent, a drop of 10 basis points from one year ago.
Meanwhile, the percentage of loans in any part of the foreclosure process at the end of the first quarter was 1.74 percent, down 48 basis points from a year ago and the lowest since the third quarter of 2007.
While first-time foreclosures are the lowest since 2000, over half of all foreclosure starts are coming from mortgages that have already been in active foreclosure at least once before, and nearly 60 percent of new serious delinquencies are from pre-2008 vintage loans, says Ben Graboske, data and analytics executive vice president at Black Knight.
“What we’re seeing with regard to new foreclosure starts — and the bulk of all new troubled loans, in fact — is that they’re largely still a remnant of the crisis,” Graboske says.
Graboske adds that recent trends reflect ongoing efforts by servicers to resolve delinquencies through loss mitigation, including retention options like loan modifications and liquidation options such as short sales and deeds-in-lieu.
Velz adds that tighter lending standards may also be contributing to the drop in foreclosures and delinquencies.
The delinquency rate for mortgages on one- to four-unit residential properties was a seasonally adjusted rate of 4.77 percent of all loans outstanding at the end of the first quarter, the lowest level since the third quarter of 2006, according to the MBA, which compiles delinquency data by including loans that are at least one payment past due but not loans in the process of foreclosure.