At the rate people are filing for unemployment due to the economic impact of COVID-19, new mortgage delinquencies could surpass the number of past-due mortgages during the Great Recession.
Black Knight's latest Mortgage Monitor estimates that the 15% unemployment rate projected by Goldman Sachs for the second quarter could result in 3.5 million delinquencies.
However, quantifying the effects of a crisis this big can get tricky, according to Black Knight President Ben Graboske.
"Trying to gauge the impact of COVID-19 on mortgage performance is as much an art right now as a science," he said. "The fact is that there is no true point of comparison in the nation's recent history for analysts to model against. That said, there are some historical clues that can help shed light. In the Great Recession, for example, the number of past-due mortgages tripled over four years, increasing by more than 5.5 million, as the unemployment rate rose relatively sharply from 4.5% in 2006 to 10% by the end of 2009."
Currently, more than 10 million people have filed for unemployment since COVID-19 was labeled a pandemic on March 11, putting the unemployment rate at approximately 9.5%.
"Using the Great Recession as a point of comparison, Black Knight's AFT modeling team looked at potential delinquencies under different unemployment scenarios, and at 10%, we could expect 2 million new mortgage delinquencies,” Graboske said. “That would put the total at 4 million delinquencies with a national non-current rate of 7.5%. If unemployment climbs to the 15% recently projected by Goldman Sachs, we could be looking at 5.5 million past-due mortgages. Should unemployment reach the 32% projected by the Federal Reserve Bank of St. Louis, the non-current rate could spike to nearly 19%, surpassing what we saw during the Great Recession, with 10 million homeowners past due on their mortgages."
Effectiveness of forbearance programs
In light of the crisis, the government passed the CARES Act and ordered mortgage servicers to offer forbearance programs to ease some of the financial stress on borrowers.
"Pointing to the effectiveness of forbearance programs in a time of crisis, of the more than 140,000 seriously delinquent mortgages caused by the 2017 hurricane season, just 1% of homes were lost to foreclosure or short sale two years after the storms," Graboske said. "Although should financial disruptions become more long-term, additional assistance programs may become necessary. Of course, a surge of forbearance requests brings its own challenges, both operational and financial."
The spike in forbearance requests is inundating servicers' operations. At the same time, servicers will still need to pay billions of dollars per month in principal and interest (P&I) advances to government-backed securities holders.
"If even just 5% of homeowners with GSE- or GNMA-securitized mortgages seek forbearance, those costs would be more than $2.1 billion per month," Graboske said. "At 10%, the monthly cost owed to securities holders would jump to $4.2 billion and at 20% to $8.48 billion."
Whipsaw effect on refinances
The report also showed that market uncertainty has also resulted in a wider gap between 10-year Treasury yields and 30-year fixed-rate mortgage.
The increased interest rate volatility had a "whipsaw effect" on refinance incentive, with the number of borrowers who could both qualify for a refinance rising as high as 14.3 million in the first week of March to plunging to 3.3 million by March 12 before growing back to 10 million as of March 24.
Additionally, Black Knight recorded fluctuations in purchase demand and home affordability, with the average home price shifting by more than 13% over the last two weeks. This makes it harder for prospective buyers to estimate how much home they qualify to purchase and for those under contract to know when to lock in their rate.