Mortgage defaults

Investment Analysis Clubs Macro Economic Trends and Risks
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Sometimes forbes is hot garbage so i never really know what to make of it. But the article suggest mortgage defaults going up at a high rate. From what i can see on the ground there are (finally) quite a few houses on the market. After 2 or three years of almost no houses for sale (not sure if everyone was holding onto low interest mortgage - or houses were just being sold that fast with no new inventory). These houses that are on sale (now this is columbus suburbs, so may not apply to hcol locations) are almost always undergoing price reductions and sitting in the market for weeks. Newsletter i got from my realtor said average was 30 days now.

Not sure if these means that its actually becoming a buyers market bc inventory caught up/ppl are being forced to move by ARM or job relocations … or if this just portends a weakening economy with trouble ahead (as the article implies). Thoughts?

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It is expected.

People are cash buyers right now. The equity is not in the homes for getting a loan.

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Aging population implies more people downsizing. They are often cash buyers.

First time home buyers continue to struggle. Rising costs—labor, tariffs, materials, and interest rates—continue price pressures.

Home sellers probably ask for peak market price. But settle for less when house does not sell quickly.

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Im wondering if the increase in sales (and price cuts) im seeing on the ground is, as you suggest ppl downsizing that have paid off their mortgage, or new inventory finally providing some relief to buyers, or people selling bc they can no longer afford their mortgage (as the article implies)

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The key point in the article is rising defaults “in the middle.” That is to say, not the subprime mortgages that triggered the 2008 financial crisis but rather homeowners who have decent credit scores but are being squeezed by adjustable rate mortgages rising due to higher interest rates, consumer price inflation and stagnant real wages.

The data does not show a significant uptick in delinquencies of Single-Family Residential Mortgages.

There is a teeny-tiny uptick in the trend but this is insignificant. The same can be said about the delinquency rate on all loans.

The data does not support the thesis of the article.
Wendy

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I second that. :slight_smile:

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My parents just sold their home and moved up to MA. They had to wait three weeks to get two low ball offers. The two bidders were told of each other. One dropped out and the other went above the ask.

That is going to dry up now.

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I have to disagree. The thesis of the article is in the first paragraph:

…early delinquencies are rising faster than any other type of consumer credit. The stress is real, it’s coming on early, and it’s going faster than most investors think.

The data is from VantageScore showing that mortgage defaults are increasing at a faster rate than other debts. VantageScore - Rising Mortgage Delinquencies Point to Potential Credit Stress: May 2025 VantageScore CreditGauge™

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The thesis is that this is an early indicator of significant financial stress by borrowers. The absolute numbers are below historical averages, but these folks see the trend as concerning.

I would add that this early indicator is consistent with evidence of declining consumer spending. If Americans are feeling increasing concern about servicing their debt, they probably won’t be buying much. NRF: Retail sales slowed in June - Talk Business & Politics

Combine this with the expectation of rising prices from tariffs/worker shortages and the near term future of the economy seems…challenging.

Or, to paraphrase Ross Perot, that giant sucking sound you may soon hear will be from deflating stock prices.

October might suck.

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The below gives you slightly better picture. See the uptick in VA foreclosure inventory? VA foreclosure moratorium was in effect through the end of 2024. The moratorium is to allow a new program, but it ended without the new program.

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I would look for the serious delinquency, of 90days +, to get a better picture.

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I agree that it is worth watching this for Q2.

Q1 2025 data

…seriously delinquent VA loans (90+ days or in foreclosure) were up 50 basis points year-over-year. FHA loans also saw a sharp 80-basis-point increase in serious delinquencies from the same time last year…MBA’s latest Commercial Real Estate Finance (CREF) Loan Performance Survey also showed a continued uptick in delinquency rates for commercial properties…“The delinquency rate for commercial mortgages increased again in the first quarter of 2025, driven by higher delinquencies on lodging and industrial properties,” Mortgage delinquency rates rise on VA loans as safety net expires | Mortgage Professional

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One thing that astounds me repeatedly is that journalists don’t even try anymore. Instead of finding a real and relevant example, they simply write (and lately, just have an AI write) an article with whatever they have. Here’s an example - https://www.cnn.com/2024/07/01/business/adjustable-rate-mortgages-higher-payments

Last year, when Jennifer Hernandez received notice that the mortgage payments on her Houston home would jump about $2,000 per month, she was stunned.

Okay, good hook, unfortunate person with a sudden huge increase in monthly payment.

Hernandez refinanced her home loan in 2016 using an adjustable-rate mortgage loan, which has a low introductory rate for a fixed initial period.

Ah, so she had from 2017 through 2022 to refinance into a fixed rate loan at VERY low rates, as low as 2.625%, but certainly under 4%. Okay, maybe still unfortunate because of general ignorance…

Hernandez, who is herself a loan officer, had misremembered the terms of her $1.1 million loan: rather than a 10/1 ARM, which has a fixed rate for the first ten years and resets every year after that, Hernandez had taken out a 7/1 loan.

Ah, so NOT ignorance. She is intimately familiar with how loans work. It’s her job! And the mistaking 7/1 versus 10/1 is no excuse. Whether it was a 7/1 OR a 10/1, when those extremely low fixed rates were available, it was crazy to not refinance ANY adjustable mortgage into a fixed loan to lock in those low rates. The only exception, of course, is if you were planning an imminent move.

I’ve been slammed with kids and work for the last seven years.

Yes, the REASON you were slammed with work is because all those customers were taking advantage of the lowest rates they are likely to see in their lifetimes.

The author of this article could have found a much more sympathetic example. Maybe someone who was in the process of refinancing in 2022 and suddenly lost their job so the mortgage bank couldn’t get the refi to go through. And now they are stuck with their rate adjusting higher.

ARMs have become more popular over the last 2 years, and that’s because they always become popular when people expect rates to drop in the future. But I wonder if mortgage rates will drop much as short-term rates go down? Remember that mortgage bonds compete with treasuries (let’s say 10-year, 20-year, and 30-year vintage to some extent) and there is a very large supply of those, so with a very high supply overall (of bonds with 8+ year average duration), and maybe somewhat higher demand, prices aren’t going to rise much, and if prices of bonds don’t rise much, their rates don’t drop much.

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I would recommend you ignore the example, and just focus on how many ARM’s that are going to adjust to current-higher rate. Most of these folks have some gains in the home equity and home price increase. So, will they sell and take the gains, nope, home is not a stock, where you can be (for many including your sincerely is a challenge) rational and emotionless and sell.

Now the reset, how is it going to play out? impact on consumer spending, higher credit card balance, some houses going into repossession? Now many thrift’s and smaller banks have big mortgage loans on their books. So if you own any, look for some soft underbelly.

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Maybe copy the article words and to strip it of the “hook”, dump it into an LM (Large Model, ChatGPT, Grok, etc) and ask it to summarize how many ARMs are going to adjust to current - higher rate?

:thinking:
ralph

I copied the URL and dumped it into Grok
Grok gave a sorta decent “summary”, but then combined it with an ongoing search I have on Gout.
It tied ARMs to Gout via the $$treatments for gout and how an increased mortgage payments might impact treatment options.

FWIW.

It amused me

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ripped from the headlines

I noticed a piece on the wire today: a proposal about making cap gains from home sales tax exempt. Once upon a time, there was a one-time in a lifetime exemption, but that seems to have gone away. Imagine the house flipping that could go on with an infinite exemption…with the financial industry taking a skim off each flip.

Steve

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Remember we have a real estate guy in the white house. All he cares about is building some ugly walls, flipping the house and financing them with cheap loans…
:slight_smile: :slight_smile:

Joking aside, politicians are targeting elderly with these, so that they can get their votes. History will judge Boomers as the most selfish generation.

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Very, VERY, few ARMs are adjusting to higher rates right now. That’s because we just had 10 years of very low fixed rates and the vast majority of people chose to take fixed rate mortgages (more than 90%). Only over the last year or two have ARMs become popular again, and almost all of those won’t adjust for 5/7 (or rarely 10) years from 2023/4. And ARMs are still nowhere near as popular as they were in 2005 when more than 40% of mortgages taken out were ARMs.

I can’t get any of the AIs to give a sensible response regarding how many ARMs will adjust in 2025-26.

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Spending on services is the story. With the tariffs goods are going up in price. Spending on services should be dropping but I have not see data yet. The service sectors are 80% of the economy.

I have a friend who is an artist born in 1935. The amazing thing about 1935 is that the birth rate was at its lowest ever in the 1900s. When he wanted a job, there was very little competition. He could choose to do whatever he liked.

I was born in 1963, the highest birth rate of the Boomers. When I was a Junior in high school my second job was hard to get during the 1980 downturn. I could not get a dishwashing job. I got a pot scrub job. While we got jobs all along we got laid off as the laws changed and employment goals constantly shifted.

Most of you are older Boomers. Your experiences are more stable employment. That entirely disappeared by the 1990s for the generations coming after you.

Is it selfishness? Was the friend born in 1935 who did whatever selfish?

We had supply-side economics. We took one for the team.

It is 10 or 20% of Boomers that have the wealth. Most Boomers shut themselves out of wealth. If you want to call many of the Boomers a bit slow, I’d agree.

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Right now… Around 5% of outstanding mortgages are ARM’s according to FHFA. Many of them will reset to 2.5% to 3.5% higher rate. For many it will be 60% to 100% increase in their monthly mortgage payment. Agencies have typically securitized these loans. So how exactly this is going to play out needs to be seen.

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Most ARMs have a cap of 2% on the annual increase (so they won’t go up by “2.5% to 3.5%” in one fell swoop). And common ARMs have a 5 year or 7 year period before they increase at all. Not many ARMs were taken in 2019-2023 because the fixed rates were so low that taking an ARM was an absurd choice. So most ARMs out there are only a year or two old, so they’re not going to adjust until 2028-30 at the earliest.

If enough of them start defaulting, it won’t play out well at all!

If there are any mortgage experts out there, please comment!

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Depends, if your rates reset every 6 month, then at the first 6 month it goes up by 6 month and then by another 1%, and, on and on.. until you hit the max rate.

That is the reason the outstanding ARM mortgages are 8% compared to 15%+ historical rate.