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MortgagePoint » Your Trusted Source for Mortgage Banking and Servicing News 52 January 2024 F E A T U R E S T O R Y W hether you believe it will happen next year or in five years, it is inevitable that we will face a default spike of some sort in the near future. While default rates have remained artificially low for years, this is the result of a combi- nation of public and regulatory pressure to avoid foreclosure at all costs at a time when most lenders have had the capital reserves and financial incentive to lean heavily on loss mitigation instead of foreclosure. This is most certainly not a bad result. However, as interest rates continue to remain relatively high, lenders are increasingly finding that their ability to absorb the time and cost of undertaking a mitigation-first approach is declining. With market conditions expected to remain subdued or deteriorate through 2024 and possibly into 2025—especially regarding rates and inflation—we're already starting to see some increases in both default and foreclosure rates. While talk of foreclosure and default tends to trigger memories of the foreclosure spike of the early 2010s, the next surge will look decidedly different. The regulatory and legislative environ- ment has changed. The perspective of mortgage lenders and servicers towards delinquency has changed. And the num- ber of tools available to manage a sudden increase in default activity has increased exponentially. What's Different About Default in 2023? F or many outside the mortgage lending industry, especially among the general public, talk of the Great Recession and housing meltdown evokes heart-wrench- ing images of sheriffs evicting unfortunate homeowners who've recently lost jobs or vacant, unkempt nuisance properties sitting unmaintained and off the market for months or years. We are reminded of the horror stories about large banks fore- closing at the drop of a hat, or we recall old news articles about evictions being carried out on the wrong properties. It's those exact stories and images that drove a wave of public indignation that resulted in a stream of regulatory reform to the foreclosure process. After 2015, lenders and servicers were given in- centive to avoid foreclosure and a much larger list of requirements that needed to be exhausted before a full foreclosure process could be initiated. The pandemic of 2020–2021 was a great test for this new combination of incentives and deterrents to foreclosure. Although mortgage delinquency rates reached their highest levels since the peak of the Great Recession in 2010, the default rate remained well below that seen in 2010 and 2011. Although lenders have never looked to default and foreclo- sure as optimal outcomes by any means, their aversion to those processes has only grown. However, as market and eco- nomic pressure on their capital reserves increases, it's entirely possible they'll be forced to take on foreclosure proceedings in the future that they would otherwise have avoided two years ago. The signs are already there, and much like an iceberg, there's a lot more beneath the surface. While financial incentives and assistance have, thus far, helped keep the foreclosure rates low, banks and lenders, pressed for liquidity themselves, are becoming more stringent in that category. Some estimate that up to 300,000 homeowners receiving payment assistance could lose that in 2024. What Will be Different When Default and Foreclosure Rates Rise? A lthough public and political pres- sure has played a role in lenders' increased aversion to the foreclosure process, the number-one reason remains that it's expensive, time-consuming, and likely results in the lender gaining pos- THE NEXT DEFAULT SPIKE WILL BE UNLIKE ANY WE'VE SEEN BEFORE Things have changed dramatically in the way the default and foreclosure world operates. B y M I C H A E L K R E I N M I C H A E L K R E I N serves as President of the National REO Brokers Association (NRBA) and Managing Partner for House Karma, a digital ecosystem created to facilitate affordable homeownership and neighborhoods. Reach Michael at mkrein@nrba.com.