Frail Housing Market Before Hurricane Maria
Prior to Hurricane Maria, Puerto Rico faced significant fiscal challenges, including high rates of debt, poverty, and unemployment coupled with a frail housing market. According to Puerto Rico’s Officer of the Commissioner of Financial Institutions, more than 5,700 homes were foreclosed in 2016, which is more than double the foreclosures from a decade ago. The foreclosure moratorium granted after Maria have greatly slowed the rate of foreclosures but there is evidence that the rate could drastically increase to even greater levels later this year. Additionally, it is estimated that half of Puerto Rico’s housing stock is informal housing, which presents a unique challenge in rebuilding efforts after a storm such as Maria. Informal housing construction refers to homes that are not built in compliance with the local housing code and where in most cases the homeowner does not have title to the land. Without proof of ownership, homeowners cannot receive FEMA assistance to repair their home from damages caused by Maria. Recent FEMA data shows that over 725,000 owner-occupied homes were damaged due to Maria, and as of May 2018, more than $632 million has been approved for FEMA Housing Assistance for 210,000 homes.
Unprecedented Delinquencies After Maria
Our analysis shows that nearly 90,000 borrowers are delinquent after Hurricane Maria. Considering the level of home damage and the negative impact to the economy, it is no surprise that residential mortgage delinquencies have increased to a ten year high. When comparing pre-storm and post-storm mortgage performance, we found:
More than one in five loans are 30 or more days delinquent. As of January 2018, 23% of loans were 30 or more days delinquent, which is nearly double the rate from August 2017 (before Maria) and 5 percentage points higher than the rate during the housing market crash of 2009-2010 period.
More than one in ten loans are 90 or more days delinquent. As of January 2018, 13% of loans were 90 or more days delinquent, which is also more than double the rate before Maria.
More than 60 percent of the delinquent loans are 90 or more days past due. As of January 2018, 56,000 of the 87,500 delinquent loans were 90 or more days past due.
The figure below shows the delinquency rates from Before Maria (January 2017) compared to After Maria (January 2018).
Another indicator of mortgage performance is the early delinquency rate. After Maria, there was a significant increase in early delinquencies (newly originated loans that are delinquent) from 0.9 percent in Q3 2017 to 3.9 percent as of 4/30/2018. Puerto Rico's early delinquency rate is the second highest rate in the US (Florida is first) and is two percentage points higher than the nationwide average of 1.7 percent.
Majority of Residential Mortgages No Longer Covered by Foreclosure Moratorium
While some of the delinquencies may self-cure, many may require extensive loss mitigation or else result in foreclosure. In response, lenders and mortgage insurers, including FHA, implemented foreclosure and payment moratoriums - all of which varied based on the type of loan - to provide short-term relief to borrowers. SP Group conducted an analysis to identify the number of loans associated with each moratorium deadline. Until now, there has not been a study that has amalgamated the public data sources to understand the number of loans under each loan type - Insured, Conforming and Non-Conforming - and the respective moratoriums. We found that of the approximately 385,000 active residential loans in Puerto Rico, about 60 percent are no longer covered by a foreclosure moratorium. The remaining 40 percent are insured loans (FHA, USDA and VA) that are covered under extended foreclosure moratoriums. Of the insured loans, one-third are backed by FHA and were granted a moratorium extension until August of 2018.
Looming Foreclosure Crisis?
For the loans that are no longer covered by a moratorium, we are seeing evidence of foreclosure activity, especially from non-banks. Based on federal court data, non-banks (typically holders of non-conforming loans) have been foreclosing throughout the aftermath of Maria – they have foreclosed at lower levels but the filings are increasing each month. There have been over 90 foreclosure filings since Hurricane Maria, of which the majority were filed by non-banks and one-third of filings occurred after May 2018. Additionally, non-bank, Rushmore Loan Management Services, held the second largest amount of REO Inventory in December 2017 (667) behind Puerto Rico’s largest bank, Popular, Inc. (1,919), despite owning a portfolio 50 times smaller than Popular’s. With the end of all foreclosure moratoriums in August 2018, there is a level of uncertainty surrounding the re-performance of delinquent mortgages that is amplified by the island’s pre-existing and new economic challenges; the moratorium only provided a temporary pause and once it sunsets, may be followed by another foreclosure crisis that was already in the making.