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Why loan performance could establish a ‘new normal’ in 2022

By Bonnie Sinnock | January 25, 2022, 5:20 p.m. EST

The market might need to rethink its benchmark for mortgage performance as pandemic stimulus gets rolled back this year, according to Fannie Mae Chief Economist Doug Duncan.


This observation, made in line with his forecast that housing will more broadly be moving toward a “new normal” this year, reflects the extent to which federal policy has reshaped servicing dynamics.


Most typically, measures like delinquencies have referenced comparisons to the long-term average or the historically low pre-pandemic rate, but it’s unclear which of these (or whether either of them) is most relevant under current workout rules.


“That’s an interesting question given all the regulatory change that has taken place over on the servicing side of the business,” Duncan said in an interview with this publication, noting the timelines and criteria for mandated workouts have changed.


“Going forward, with the removal of the stimulus and the income-transfer payments within it, for people that have difficulty meeting their mortgage payments, it'll be more challenging,” Duncan said. “It'll go back to more longer-term trends…related to normal levels of income growth.”


Absent permanent change to servicing rules, loan performance measures like delinquencies likely will return to levels near their historical norms but remain relatively strong due to the fact that loan quality has been particularly good, according to Ralph McLaughlin, an economist at Kukun, a provider of property data and predictive analytics.


“We should expect loan performance to revert back to the long-run average, principally because federal regulations artificially (but rightly so) reduced defaults and foreclosures through very generous forbearance programs,” McLaughlin said in an email. “Now that these protections have been lifted, loan defaults and foreclosure are likely to increase as borrowers who are still suffering economic hardships from the pandemic are more likely to be pushed through the foreclosure pipeline than at any point in the last two years.”


However, high home prices and levels of equity may help to contain foreclosures in 2022 by making alternative workouts attractive, Duncan said. Also, while home prices will outpace income growth due to inordinate demand from ongoing household formation, it is being offset by some tighter underwriting emerging in the mortgage market, in debt-to-income requirements, for example.


He also noted that while stimulus is being phased out, the amounts some consumers have accumulated could fuel their spending.


“While the savings rate is now a little bit lower, maybe a half a point lower than it was at the start of the pandemic on balance sheets, households have $2.5 trillion more than would've been anticipated in the trend pre-COVID. So, they actually have a lot of cash [but] more of it is in higher income households,” Duncan said.


Because of this, while experts consider a slight uptick in delinquencies likely at some point, they forecast its arrival will be uneven and gradual.


“Delinquency should nudge some as CARES Act and like relief measures run their course,” said Stephen Staid, executive vice president of mortgage practice strategy at industry outsourcer Sourcepoint, in an email. “Some industries such as tourism and hospitality will see longer-term issues as COVID restrictions continue beyond the relief period.”

He expects late payments to increase as those affected look for work in other industries in a transition that could take time and potentially result in lower incomes.


“This likely increase in delinquency will be a bit sticky as delinquent loans will take two-plus years…to work through the default process,” Staid said, noting that the loss mitigation measures currently available will help contain the number of people affected.






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