Delinquency rates are one of the key metrics that mortgage businesses must monitor. High delinquency indicates poor loan health, which, in turn, may lead to foreclosures, operational challenges, and loss of revenues.
Declining delinquency is generally a good thing, indicating borrowers’ ability to make payments on time. However, the dip in mortgage delinquency rates is not always organic, which means that mortgage providers must prepare for the inevitable event of it rising again. There are several ways to anticipate and prepare for a decrease in mortgage delinquency rates, which are all extremely relevant given today’s economic climate.
Understanding the State of Mortgage Delinquency Rates in 2022-23
Delinquency rates in mortgage can be defined as the percentage of home loans that an institution has meted out, which have not been paid by the borrower within a stipulated period. Typically, a loan is said to be delinquent only after the customer has missed two consecutive mortgages. After a period of 270 days in the US, the mortgage is considered to be in default.
There are also several types of delinquency depending on the days for which a payment is due – i.e., early-stage delinquency for 30-59 days, adverse delinquency for 60-89 days, and serious delinquency for payments outstanding 90 days or more. Since 2021, mortgage delinquency rates, as well as mortgage default rates, have seen a steady decline.
In 2020, at the height of the COVID-19 pandemic, it increased sharply to over 12% due to challenging economic conditions and the loss of jobs. As the market recovered from 2020 onwards, this has now dipped to 6% or less. As we said, the decline is not always organic and can be influenced by intentional factors. For example, the CARES Act by the U.S. government regulated foreclosures through moratoriums and controlled defaults to a larger extent.
As of August 2022, mortgage delinquency rates fell to a 43-year low, surpassing even the pre-pandemic levels of 2019. Barring minor dips month-on-month, loans across all product types (including Federal Housing Administration or FHA loans, Veterans Affairs or VA loans, and conventional mortgages are now less likely to become severely delinquent.
A decline in mortgage delinquency rates is almost always correlated to declining unemployment. As urban and rural regions come back from pandemic-era job loss and the US beats growth expectations with the creation of 398,000 jobs in June 2022, this trend is expected to continue next year.
Read More: 5 Ways to Streamline Default Servicing
What Does Declining Delinquency Mean for Mortgage Providers?
There are five things mortgage providers must remember in this period of low delinquency rates, which may continue for the foreseeable future.
1. The need for more agile default servicing
Default servicing refers to the process of handling a potentially delinquent loan so that it does not end in foreclosure, or, at least, the foreclosure should not cause revenue loss for the lender. There has been an unpredictable volume of defaults in the US due to inflation, fast-changing employment trends, and forbearance laws. To prepare for this, mortgage providers need to streamline default servicing and ensure they can scale up or down as per the latest delinquency rates.
2. The rise of advanced data analytics to map and predict delinquency
Alongside scalability and agility, mortgage providers should be able to map historical trends and predict future patterns. Advanced data analytics solutions like Power BI can transform how providers use and mobilize delinquency data. Fortunately, relevant market reports are almost always available through agencies like the Mortgage Bankers Association (MBA) and credit bureaus. An analytics dashboard can ingest third-party and internal data to develop highly accurate predictive models.
3. Greater operational capacity to accommodate demand
A bullish market typically accompanies low delinquency rates, since borrowers are able to pay their mortgage on time and may therefore invest further. Meanwhile, high property prices prevent ineligible borrowers from entering the market, which further controls mortgage default rates. In this environment, lenders may witness a rise in demand in select market segments and for specific products. They need greater operational capacity – either by partnering with an outsourcing provider, using artificial intelligence for efficiency, or both – to accommodate demand.
4. Mortgage process automation to maximize new opportunities
Automation is one of the lowest-hanging fruits when it comes to boosting efficiency and freeing up resources for new opportunities. Automation use cases in mortgage range from automated borrower assessments to speed-up underwriting to faster document processing. As delinquency rates fall, mortgage providers can automate high-volume and repetitive tasks to free up executives, who can then pay attention to healthy loans and maximize high-lifetime value borrowers.
5. Outsourcing property preservations to save cost
Lower delinquency means fewer mortgages ending in a default state, and, therefore, a smaller number of properties in foreclosure. As foreclosure numbers decrease, it is advisable to outsource property preservation so that one does not have to maintain a fully-functional in-house unit without a lot of defaulting properties to manage. This will also help deal with bad property preservation contractors who could unnecessarily hinder business growth, despite low delinquency and optimal portfolio health.
Navigate Dips and Spikes in Delinquency with Nexval
As the 2008 recession and then the COVID-19 pandemic has shown, mortgage delinquency rates can be highly volatile and can change sharply in months. Mortgage providers need to be prepared for both dips and spikes, owing to seasonal flux, regulatory changes, natural disasters, and overall market volatility.
At Nexval, we help leading mortgage providers in the US navigate these crests and troughs with expert outsourcing support, cutting-edge technology, and tailored solutions for your requirements and budget. Speak with Nexval’s Tech Gurus to learn how!