Delinquent Borrowers Tend To Use IRS Tax Refunds To Get Caught Up

What do most Americans do with their income tax refund checks – should they be so lucky as to receive one?

Why, pay bills, of course!

Because, with the way things are, it’s not likely much of this “windfall” money will actually make it back into the U.S. economy.

This includes, of course, mortgage payments. Traditionally, January is the worst month out of the year for delinquencies and defaults. And that’s really a function of two main things: 1) the fact that most Americans overspend when it comes to the holidays, and 2) the typical “seasonal” worker often runs out of work when December rolls around.

These factors tend to put a high percentage of U.S. consumers behind the eight ball when it comes to paying their bills.

As a result, a high percentage of consumers who receive income tax refund checks from the Internal Revenue Service (IRS) tend to use those funds to get “caught up.”

The most recent Mortgage Monitor report from Black Knight Financial Services bears this trend out. It shows that up to 300,000 delinquent mortgage borrowers may use their tax refunds to bring their mortgages current in 2017.

As per the report, the IRS usually mails out its refund checks in February and March. It just so happens that most mortgage borrowers who are behind get caught up in, you guessed it, February and March. It’s perhaps no great secret that a lot of these folks are using their refunds to get caught up.

“Looking at IRS filing statistics, we see that nearly one in five Americans file their returns within the first two weeks of tax season, and over 40 percent had completed their taxes by the first week in March,” says Ben Graboske, executive vice president of Black Knight Data & Analytics. “Unsurprisingly, incentive played a big role in this timing; not only were Americans who filed early more likely to receive a refund than those filing later, but they also received larger refunds on average. Likewise, mortgage cures – delinquent borrowers who bring themselves back to current status – correspondingly spike in February and March, as well, suggesting that some portion of Americans are using their tax refunds to make past-due payments on their mortgages.”

And 2017 won’t be any different, Graboske says.

“We see this increase in cures across the delinquency and foreclosure spectrum, but it is most pronounced in the early and moderate stages of delinquency,” he adds. “This makes sense, in that a tax refund may be sufficient to pay a few months of past-due mortgage payments but is likely not enough to bring a homeowner out of severe delinquency. Likewise, the most pronounced impact was seen among Federal Housing Administration [FHA]/Veteran Affairs [VA] borrowers, who might be expected to have less cash reserves on hand and, therefore, be more dependent upon the infusion of funds during tax refund season to pay down late payments.”

At 40%, FHA/VA loans see the most pronounced spike in tax season cures, with early- and moderate-stage delinquencies seeing the greatest impact, the report shows.


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