A report from DS News. "Foreclosure auction inflow data points to a third wave of post-recession distress building in late 2019 and early 2020. A total of 43,232 residential properties nationwide were referred to Auction.com in Q3 2019 for a potential future foreclosure auction, up from the previous quarter and a year ago to the highest level since Q1 2017. The characteristics of the increasing foreclosure auction inflow are distinct enough to label it a third wave of distress emerging in the wake of the Great Recession."

"The first and largest wave comprised primarily risky loans originated during the 2004-2008 housing boom. The second post-recession wave of distress emerged in 2018 as the result of a series of devastating natural disaster events—primarily hurricane-related—in 2016 and 2017 in Florida and Texas. The emerging third wave of post-recession distress is showing up in parts of Florida and Texas, but it is also showing up in markets far removed from Florida and Texas (see below for some more geographic details). That’s because this wave is less characterized by geographic concentrations of distress and more characterized by concentrations of distress based on loan type and lender type."

"More to the point, the emerging third wave of distress is primarily driven by a rising undercurrent of defaults among government-insured loans and privately held loans. Two sub-categories within the overall government-insured space stand out: VA-backed loans with a 31% increase and FHA-backed loans serviced by mid-market lenders—many of them so-called nonbank lenders and servicers—with a 17% increase."

"The Black Knight report shows that the delinquency rate at six months after origination is trending higher for loans originated in 2018 and 2019, with a more extreme upward trend among Ginnie Mae-securitized loans—primarily comprising VA- and FHA-backed loans. The report shows that 3.3% of Ginnie Mae-securitized loans originated over the past 12 months were delinquent at six months, up from 3.1% for loans originated in 2018 to the highest level since 2009."

"Among all loan originations, the delinquency rate six months after origination was 1% for loans originated in the first quarter of 2019, up from 0.9% for loans originated in 2018 to the highest level since 2010."

"Among 2,410 counties with foreclosure auction inflow into Auction.com in Q3 2019, 870 counties (36%) posted a year-over-year increase in foreclosure auction inflow, including Maricopa County (Phoenix), Arizona; Miami-Dade County, Florida; Los Angeles County, California; and Bexar County (San Antonio), Texas. Also posting year-over-year increases in foreclosure auction inflow in Q3 were all three counties in the Seattle metro area: King, Pierce, and Snohomish; and three counties in the Denver metro area: Denver, Arapahoe, and Adams."

"'Some of the markets with the biggest inflow increases in the third quarter may be surprising given they have been rock stars of the real estate recovery of the last seven years,' said Jesse Roth, SVP of Strategic Partnerships and Business Development at Auction.com. 'But those markets may now be victims of their own success, with an unsustainable run-up in home prices pushing the limits of affordability for many homebuyers in recent years. Those financially stretched borrowers now have less equity cushion to protect against foreclosure, particularly if they are in a government-insured loan that came with a low down payment and down payment assistance.'"

"The inflow geographic trends align with recent foreclosure start data released by ATTOM Data Solutions, which shows that U.S. foreclosure starts in the first nine months of 2019 increased in 14 states and 80 of 220 metropolitan statistical areas analyzed (36%). Among larger metro areas, those posting year-over-year increases in the first nine months of the year included Atlanta (up 23%), Orlando (up 24%), Jacksonville (up 7%), San Antonio (up 8%), Seattle (up 7%), and Denver (up 3%)."

"Given no other shocks to the economy or housing market, this emerging wave of distress will likely be the smallest of the three that have materialized in the wake of the Great Recession. However, if dangerous rip currents develop in the housing market (think widespread and sustained home price depreciation) or in the larger economy (think recession), this distressed wave could pack a bigger punch."

From Market Watch. "Buying a pricey house, but have weak credit? Increasingly, that’s not a deal-breaker. Next year the process of obtaining a new home loan could get easier for borrowers with spotty credit, according to Moody’s Investors Service. The credit-ratings firm sees more lenders willing to finance buyers in the months ahead with less-than-pristine credit by lowering their standards to offset a housing market drained of affordable options."

"''Reduced home-purchase affordability will continue to drive lenders to loosen credit standards to maintain volumes,' wrote Moody’s analyst Donald Lee in the credit-ratings firm’s 2020 outlook. 'With shrinking home affordability, the underwriting quality for non-prime mortgages will weaken as increased lender competition leads to lower standards.'"

"The credit-rating firm does expect growth in mortgage volumes to non-prime borrowers that include 'a high percentage' of loans with 'limited or alternative documentation,' which ultimately will be packaged into bond deals without government backing."

"Moody’s analysts expect non-prime mortgages will 'remain an important funding source for an underserved market' in the year ahead, including through some nonstandard loan offerings that fell out of favor with borrowers in the aftermath of the housing crisis. 'New originators and issuers will enter this market,' Moody’s analysts wrote, and 'transactions backed by Helocs, closed-end second liens and loans backed by manufactured homes are likely to return.'"

"Meanwhile, more borrowers have been falling into the subprime category this year. Even with the U.S. unemployment rate at a 50-year low of 3.5% in November, this chart shows the recent decline in credit scores for borrowers who range from 30 to 59 years old."

"Unlike U.S. stocks, the housing market is showing signs of wear and tear. 'In many ways, the state of the housing market resembles that of a fixer upper. Some things are broken: foreign buyers are buying less, there is more supply and most importantly, affordability levels are stretched in some parts of the country,' wrote analysts at JPMorgan & Chase in a November note to clients."