Why a Foreclosure Wave Isn’t on the Horizon

Why a Foreclosure Wave Isn’t on the Horizon

Even though data shows inflation is cooling, many people are still feeling the pinch on their wallets. The high costs of everything from gas to groceries are fueling unnecessary concerns that more people will struggle to make their mortgage payments. But does that mean there’s a big wave of foreclosures coming?

Here’s a look at why the data and experts say that’s not going to happen.

There Aren’t Many Homeowners Who Are Seriously Behind on Their Mortgages

One of the main reasons there were so many foreclosures during the last housing crash was because relaxed lending standards made it easy for people to take out mortgages, even when they couldn’t demonstrate they’d be able to pay them back. At that time, lenders weren’t as strict when evaluating applicant credit scores, income levels, employment status, and debt-to-income ratios.

Since then, lending standards have tightened significantly. Lenders have become much more diligent when assessing applicants for home loans. This means we’re seeing more qualified buyers who have a lower risk of defaulting on their loans.

As a result, data from Freddie Mac and Fannie Mae shows that the number of homeowners who are seriously behind on their mortgage payments (known in the industry as delinquencies) has been declining for quite some time. Take a look at the graph below:

What this means is that not only are borrowers more qualified, but they’re also finding ways to navigate through their challenges. They are exploring their repayment options or even using the record amount of equity they have to sell and avoid foreclosure entirely.

The Answer Is: There’s No Sign of a Wave Coming

Before there can be a significant rise in foreclosures, the number of people who can’t make their mortgage payments would need to rise significantly. However, since so many buyers are making their payments today and homeowners have built up substantial equity, a wave of foreclosures isn’t likely.

Take it from Bill McBride of Calculated Risk—an expert on the housing market who, after closely following the data and market leading up to the crash, was able to see the foreclosure crisis coming in 2008. McBride says:

“We will NOT see a surge in foreclosures that would significantly impact house prices (as happened following the housing bubble) for two key reasons: 1) mortgage lending has been solid, and 2) most homeowners have substantial equity in their homes.”

Bottom Line

If you’re worried about a potential foreclosure crisis, rest assured there’s nothing in the data to suggest that will happen. Buyers are more qualified now, and that's one reason why they’re not falling seriously behind on their mortgage payments.