Mortgage Delinquencies Improving Faster than Economy, Q4 Report

At a press
conference accompanying release of the results from its Fourth Quarter 2011 National
Delinquency Study (NDS)
, the Mortgage Banker Association’s (MBA) Chief
Economist and Senior Vice President for Research and Education Jay Brinkmann said
he is frequently asked how long it might be before delinquencies and
foreclosures return to “normal.”  He said
he typically answers that “we are about halfway there.” 

Delinquencies
during “normal” times averaged around 5 percent but spiked to 10.1 during the
recession.  Now the rate is at 7.6,
half-way there.  Foreclosure starts
generally run around 0.40 percent but hit 1.41 percent in 2009 and are now just
below 1percent; almost halfway there. 
Foreclosures however are not halfway there.  They were running around 1 percent
pre-recession and rose to over 4.5 percent at the peak.  They are now only slightly below 4.5 percent.

The real
question, he said, was where we will end up; what will be the new normal?  The new parameters for lending are promising
with lower housing prices, and tighter lending standards but the economy may be
growing more slowly so a 5 percent delinquency rate might not be the new
normal.

Brinkmann pointed
to improvements
in most of the measures of foreclosure activity.  The only increase in the third quarter was in
early delinquencies, i.e. 30 to 60 days, which were up 3 percent from the third
quarter to the fourth, probably due to seasonal issues such as the holidays and
the beginning of the heating season. 

The rate
of 60+ day delinquencies was down 5 percent from Quarter 3 and 10 percent from
Q4, 2010 and loans in the 90+ bucket decreased by 39 percent from the previous
quarter and 54 percent year-over-year. 
Foreclosure starts were down 9 percent and 28 percent over the two
earlier periods and the foreclosure inventory declined by 5 percent and 26
percent.

The
improvement in delinquencies cuts across all types of loans except those backed
by FHA
and is particularly evident among those loan products which have been
most problematic.  Subprime ARMs now have
a delinquency rate of 22.4, an improvement of 267 percent since the third
quarter and subprime fixed-rate loans are down 157 percent to 19.67
percent.  Prime ARMs improved by 151
percent to 9.22 percent and Prime fixed-rate loans were at 4.12 percent, down
20 percent from the previous quarter.  FHA
loans had an increase in delinquencies of 27 percent, mostly early stage delinquencies
and Brinkmann expanded on this later in the press conference.

In most
recessions foreclosure statistics mimic unemployment figures, however in the
current downturn the problems in housing began before unemployment started to
rise, peaked at about the same time, and now appears to be clearing more
quickly.  Foreclosures are not echoing
this trend either.

Mike
Fratantoni, MBA’s Vice President for Research and Economics said that the aggregate
statistics on foreclosures are covering two very different stories.  Nationwide, slightly more than 40 percent of
all mortgage loans serviced are in states primarily using judicial foreclosure
processes.  Even in the best of times
those 22 or 23 states are disproportionately represented by the number of loans
in foreclosure – in early 2008 that share was 47.9 percent and today it is 62.5
percent.

However,
the rate at which foreclosures are initiated in judicial states deviates hardly
at all
from states in non-judicial states; it is the timelines to complete
those foreclosures that are causing rising foreclosure inventories in judicial states.  The difference in the backlog of foreclosure
inventory between the two types of states is significant and is growing worse.

As stated
earlier, FHA has not evidenced the improvements noted in other loan types.  Brinkmann said the sheer numbers of FHA loans
have skyrocketed during the recession. 
Where it typically backed about 3 percent of the nation’s loans it is
now backing 34 percent.  Thus the largest
percentage of FHA’s book of business is of a vintage where historically loans
have the greatest risk of default – at 3-3-1/2 years after origination. 

In
response to a reporter’s question about how the increased delinquencies might
affect FHA going forward
Brinkmann said that the real question is whether the
actual level encountered by an organization is higher than it planned for and
while he does not know what FHA had projected, he had heard from knowledgeable
persons that even this higher delinquency rate is lower than actuarial
expectations.   

Asked
about strategic defaults, Brinkmann said where large numbers of borrowers are
underwater, every divorce and every job loss can mean a foreclosure and
estimates of strategic defaults among these are probably overstated.

The recent
settlement with five major banks and there servicers probably won’t have much
of an impact on the foreclosure inventory Brinkmann said.  While it may speed up some that are underway
because the uncertainty is removed, new processes imposed by the settlement may
in initially cause slowdowns elsewhere.

MBA is
seeing some indication that HARP 1.0 and to a lesser extent HARP 2.0 which is
just getting off the ground may be impacting loan originations.  Perhaps 10 to 20 percent of recent refinancing
originations may be from those programs.  There is no way of knowing whether this is having
an impact on delinquencies as individual loans have little effect in a database
of 43 million loans.  Brinkmann said,
however, that the incentives offered by HARP are the right ones.

The NDS
has been produced by MBA for 160 consecutive quarters and currently covers 42.9
million loans representing 88 percent of all senior one-to-four family
mortgages.  The current survey saw an
increase of 634,000 loans from the third quarter but 767,000 fewer loans than
one year ago.  Data was reported by 120
lenders including mortgage bankers, commercial banks, and thrifts.

…(read more)

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