Foreclosure starts rose in August

 After increasing for two consecutive months, the national delinquency rate fell by 3.6% in August, to just 4 basis points above the record low set in May, Black Knight said.

However, foreclosure starts rose 14.7% compared with July and by nearly 174% over August 2021.

The improvement in performance might be short-term given the consensus that the U.S. economy is headed into a recession.

August ended with 2.79% of all outstanding loans 30 days or more late on their payments but not yet in foreclosure, representing approximately 1.489 million properties. That is 54,000 fewer properties than July and 633,000 less than in August 2021, Black Knight's First Look report found.

Of those, 567,000 borrowers were considered to be seriously delinquent, 90 days or more late on their scheduled payment. That is a month-to-month improvement of 27,000, or 4.5%. On a year-over-year basis, 772,000 fewer borrowers were in seriously delinquent status, a decline of nearly 58%.

As of the end of August, an additional 185,000 properties were in the foreclosure pre-sale inventory, a gain of 1,000 from July and of 43,000 from August 2021.

In another piece of good news, cure activity — borrowers that resume making their payment on time — improved as 62,000 seriously delinquent loans returned to current status, up from 58,000 in July.

Servicers started 20,300 foreclosures in August, up 14.7% from July and 185.9% from one year ago. Foreclosures as a percentage of loans 90 days or more late was 0.53%, an increase of 183 bps from the previous month and 173.9% over the prior year.

The five states with the highest share of seriously delinquent loans: Mississippi, 2.37%; Louisiana, 2.02%; Alaska, 1.72%; Alabama, 1.68% and Arkansas, 1.55%.

If delinquency rates were to increase as the result of a recession, the private mortgage insurance business would likely be affected but not to the extent it was following the housing crisis, according to Keefe, Bruyette & Woods.

Its analysts performed an accelerated stressed scenario on the MI's portfolios seeking to quantify the potential impact a spike in delinquencies would have on losses and capital levels.

The Primary Mortgage Insurer Eligibility Requirements, which set the amount of capital required to be counterparties for Fannie Mae and Freddie Mac, increase as mortgage delinquencies rise.

"As a result, the stressed scenario will result in a modest PMIERs deficiency," wrote KBW analysts Bose George, Thomas McJoynt-Griffith and Michael Smyth. "We believe that the industry would have numerous options to address this including a greater use of reinsurance and greater use of credit lines or Federal Home Loan Bank borrowings."

Furthermore, even if the borrower were to default, higher property values over the past two years will help to mitigate claims rates following foreclosure.

"Home price appreciation has been very strong and steady, which, combined with strong underwriting, leads us to believe that even in a sharp home price correction, home equity would still be positive and sizable enough to pay off the loan if the home were sold," KBW said.