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 still feel the pinch on their wallets. These high costs on everything from gas to groceries are fueling unnecessary concerns about trouble making mortgage payments. But does that mean there’s a big wave of foreclosures coming?

Here’s 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 primary reasons for the surge in foreclosures during the last housing crash was the relaxed lending standards that allowed people to take out mortgages without proving their ability to repay. Back then, lenders weren't strict about credit scores, income levels, employment status, and debt-to-income ratios.

Since then, lending standards have tightened significantly. Lenders now thoroughly assess applicants for home loans, resulting in more qualified buyers with a lower risk of defaulting on their loans.

That's why data from Freddie Mac and Fannie Mae show a long-term decline in the number of homeowners who are seriously behind on their mortgage payments (known as delinquencies). Take a look at the graph below: 

What this means is that borrowers are not only more qualified but also finding ways to manage their challenges. They are exploring repayment options or leveraging their record amount of equity to sell and avoid foreclosure altogether.

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

Before a significant rise in foreclosures can happen, the number of people unable to make their mortgage payments would need to increase substantially. However, since many buyers are making their payments on time and homeowners have substantial equity built up, a wave of foreclosures is unlikely.

Take it from Bill McBride of Calculated Risk, an expert on the housing market who predicted the foreclosure crisis in 2008 after closely monitoring the data and market trends. 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 concerned about a potential foreclosure crisis, rest assured that the data doesn't support this. Today's buyers are more qualified, which is why they aren't falling significantly behind on their mortgage payments.