The US economy entered the COVID-19 recession in February 2020 and in April, with the pandemic officially underway, unemployment hit a record 14.7%. This article examines the impact of the pandemic on mortgages by assessing how payment rates, that is, the percentage of mortgage borrowers who pay on time, varied between two areas with different levels of financial distress before the pandemic and the potential implication that this can have for foreclosure rates.
An earlier analysis separated U.S. ZIP codes into quintiles based on the share of households that were at least 30 days delinquent on credit card payments at some point in 2018. The table below shows the nationwide averages. Quintiles for this measure of financial hardship, as well as Quintile-level Averages for income, median home value, mortgage debt, and use of credit lines for 2018.
| quintile | |||||
|---|---|---|---|---|---|
| 1st | 2nd | 3rd | 4th | 5th | |
| Proportion of households 30 days or more past due on credit card debt | 7.4% | 10.4% | 12.6% | 14.9% | 18.6% |
| Adjusted gross income per capita | $77,277 | $48,373 | $39,819 | $34,772 | $27,746 |
| median home value | $554,501 | $358,534 | $295,048 | $266,940 | $221,784 |
| average mortgage debt | $125,647 | $85,422 | $67,484 | $55,851 | $42,701 |
| Proportion of homeowners who used 80% of the credit limit or more | 3.2% | 4.9% | 6.6% | 8.3% | 11.3% |
| SOURCES: FRBNY/Equifax Consumer Credit Panel, IRS, US Census, Zillow, and authors’ calculations. | |||||
| NOTE: Averages are weighted by the number of households in each ZIP code. | |||||
In the quintile with the least financial distress (the first quintile), an average of 7.4% of households were 30 days or more late on their credit card payments. The most financially distressed quintile (the fifth quintile) averaged 18.6%. In addition, the least financially distressed quintile had nearly three times the income, more than twice the median home value, and nearly triple the mortgage debt than the most financially distressed quintile.
In particular, the least financially distressed quintile had fewer homeowners using more than 80% of their credit limit than the most financially distressed quintile. On average, 3.2% of homeowners in the least financially distressed quintile used more than 80% of their credit limit versus 11.3% of homeowners in the most financially distressed quintile. This last indicator is crucial for understanding pre-pandemic differences among homeowners across quintiles in access to credit to respond to potential shocks.
The second, third, and fourth quintiles had values between those of the first and fifth. Therefore, in the remainder of the article, we simplify the analysis by focusing only on the first and fifth quintiles of financial distress.
The fall and rise of mortgage repayment rates
To determine how mortgage payments evolved during the pandemic in regions with different levels of financial distress before the pandemic, we combined a random sample of Black Knight McDash loan level data with the first and fifth quintiles of financial distress described above. Each month, Black Knight McDash reports the status of a loan as current (meaning payments were made on time), delinquent, in foreclosure, or other.
The following figure shows the percentage of mortgages reported as “current” from January 2019 to April 2022 for households in the least financially distressed first quintile (Q1) and most financially distressed fifth quintile (Q5). For both groups, a high percentage of the loans are current, that is, not in arrears or in foreclosure. As expected, the Q1 line is always above the Q5 line. In other words, households in low-stress ZIP codes are more likely to be current on their mortgages than households in high-stress ZIP codes. The horizontal dotted lines indicate the average percentage of loans outstanding in 2019, the last full year before the pandemic, for each group.
Mortgages current on payments over time by financial distress quintile
SOURCES: FRBNY Consumer Credit Panel/Equifax, Black Knight McDash, and authors’ calculations.
NOTE: The vertical gray bar marks March 11, 2020, the date that the World Health Organization declared COVID-19 a pandemic.
The vertical gray bar marks March 11, 2020, when the The World Health Organization declared COVID-19 a pandemic. Around this date, the percentage of outstanding mortgages decreased for both quintiles. By May 2020, the percentage of outstanding loans in the least disadvantaged quintile had fallen significantly to 91.53%, a decrease of 4.4 percentage points relative to its 2019 average of 95.93%. At the same time, the percentage of outstanding loans in the most disadvantaged quintile had fallen to 84.64%, a decrease of 5.74 percentage points relative to its 2019 average of 90.38%.
Labor income worsened for both groups during this period, but it fell much more for the fifth quintile than for the first quintile. From April 2020 to December 2020, 14.4% of people in 1st quintile ZIP codes and 21.7% of people in 5th quintile ZIP codes reported job income losses greater than 50%.
Perhaps most notably, as the figure above also shows, the current mortgage rate rebounded for both groups over the year and a half after May 2020. While the mortgage payment in the ZIP codes of the 5th quintile recovered faster than in 1st quintiles ZIP codes, the outstanding loan rate returned to the 2019 average in both quintiles. And while the current lending rate to households in the first quintile had risen slightly above the 2019 average by January 2022, the fifth quintile reached its 2019 average earlier, in November 2021. As of April 2022, the The repayment rate in the fifth quintile, where households were the most financially distressed before the pandemic, was 1.57 percentage points above the 2019 average.
What does this mean for future foreclosure rates?
As the pandemic-induced mortgage forbearance programs end in the following months, some uncertainty about the future behavior of foreclosure rates is reasonable. Even so, the recovery in mortgage payment rates suggests that foreclosure rates are unlikely to rise dramatically due to the end of forbearance programs.
final notes
- In our June 2021 Regional Economist article, “Drops in Foreclosure Rates During COVID-19 Despite Drop in On-Time Mortgage Payments,” we examine the differences between mortgage defaults and foreclosure rates in the COVID recession -19 2020 compared to the 2008-09 recession.
- See the working document “Financial difficulties and macroeconomic risks (PDF)”, co-authored with Kartik Athreya, Ryan Mather, Jose Sample-of-the-River, and John M. Sanchez.
- The data set contains approximately 99,000 loans per month for the lowest financial distress quintile (Q1) and approximately 91,000 loans per month for the highest financial distress quintile (Q5). Note that since the CARES Act established generous forbearance programs for 2020 and 2021, the non-current loans in our sample are not necessarily on their way to foreclosure. Borrowers with forbearance loans miss payments and can avoid foreclosure by resuming payments, or catching up, at the end of the forbearance program.
- See Table 5 in the previously mentioned working paper, “Financial difficulties and macroeconomic risks (PDF),” from Kartik Athreya, Ryan Mather, José Mustre-del-Río and Juan M. Sánchez.
- The CARES Act forbearance program officially began in April 2020, and borrowers could enroll until September 2021. Since borrowers could request up to a year of forbearance, the latest wave of forbearance will end in September 2022. Borrowers with Certain loans could be enrolled for up to 18 months if the initial forbearance began before February 28, 2021 or June 30, 2020, depending on the federal loan endorsement. Watch the Consumer Financial Protection Bureau for more details.
