Fiscal package will prevent record high delinquencies - Capital Economics
US Housing

Fiscal package will prevent record high delinquencies

US Housing Market Update
Written by Matthew Pointon

A surge in the unemployment rate to 12% in the second quarter will put upward pressure on the mortgage delinquency rate, but an additional $600 week in unemployment insurance should keep the rate under 7%. Moreover, given the temporary nature of the shock, relatively tight lending standards in recent years and high levels of home equity, lenders will offer widespread forbearance. That will prevent any rise in the foreclosure start rate this year.

  • A surge in the unemployment rate to 12% in the second quarter will put upward pressure on the mortgage delinquency rate, but an additional $600 week in unemployment insurance should keep the rate under 7%. Moreover, given the temporary nature of the shock, relatively tight lending standards in recent years and high levels of home equity, lenders will offer widespread forbearance. That will prevent any rise in the foreclosure start rate this year.
  • The shutdown of large parts of the US economy is set to push the unemployment rate above the quarterly peak of 9.9% recorded at the height of the financial crisis. Our current view is that the rate will rise from 3.5% at the end of last year to 12% in the second quarter. Assuming the outbreak is then brought under control, most of that spike will have been reversed by the end of the year.
  • That will boost mortgage delinquencies. Indeed, based on the past relationship the 30+ day mortgage delinquency rate will also rise to 12% in the second quarter, which would be the highest level since records began in 1979. But the substantial fiscal package set to be passed by Congress should prevent delinquency from rising that high. The extra $600 a week in unemployment insurance for the next four months, and expansion of insurance to those who don’t usually qualify, will ensure many furloughed employees see no drop in their income, and enable them to keep up their mortgage payments.
  • That said, some will drop through the cracks, have incomes that are too high to be fully replaced or simply seek to take advantage of offered forbearance. While the current situation in unprecedented, our best guess is that the 30+ day delinquency rate rises to around 7% in the second quarter. (See Chart 1.) There is a risk of a further rise once the additional unemployment insurance expires after four months, but we expect the programme will be extended if the disruption to the economy were still widespread.
  • The rise in foreclosures will be even smaller. The FHFA has already announced that Fannie Mae and Freddie Mac will suspend foreclosures for 60-days, and state governments are also moving to ban foreclosure proceedings, if only because the courts are being shut down for non-essential business. And it makes sense for banks to offer forbearance more widely. After all, mortgage lending standards have been relatively tight in recent years, and the level of home equity is high. That should encourage mortgage borrowers to make-up missed payments once the economy starts to return to normal.
  • We therefore doubt there will any rise in the foreclosure start rate over 2020. (See Chart 2.) That would be in line with experience after past disasters such as Hurricanes Harvey and Irma in 2017, when a rise in the delinquency rate did not lead to any rise in foreclosures.

Chart 1: 30+ Day Mortgage Delinquency Rate & Unemployment Rate (%)

Chart 2: Mortgage Delinquencies & Foreclosure Start Rate (%)

Sources: Refinitive, MBA, Capital Economics

Sources: MBA, Capital Economics


Matthew Pointon, Property Economist, matthew.pointon@capitaleconomics.com