MBA: Delinquency and foreclosure rates jump

The Mortgage Bankers Association just released its data on mortgage delinquencies and foreclosures for the second quarter of 2008. Here's what the numbers showed:

* The overall mortgage delinquency rate rose again to 6.41% from 6.35% in Q1 2008 and 5.12% a year earlier. This is the worst seasonally adjusted late payment rate on record (the data goes back to 1979).

* The subprime DQ rate dipped a bit -- to 18.67% from 18.79% in Q1 2008 and 14.82% a year earlier. I believe the subprime delinquency rate is likely starting to top out/stabilize at bad levels. The big problem? This mortgage crisis long since stopped being just about subprime. Indeed, the prime delinquency rate rose to 3.93% from 3.71%in Q1 2008 and 2.73% a year earlier. This is the highest reading yet.

* Delving further into the numbers, Prime ARM DQ rates jumped to 7.49% from 6.78% in Q1 2008, while subprime ARM DQs dipped a bit to 21.03% from 22.07%. Meanwhile, the DQ rate on FHA loans dipped again -- to 12.63% from 12.72% a quarter earlier.

* The foreclosure figures surged across the board. The percentage of mortgages entering the foreclosure process climbed to 1.19% from 0.99% in Q1 2008 and 0.65% a year earlier. The percentage of mortgages in any stage of foreclosure jumped to 2.75% from 2.47% in Q1 2008 and 1.4% a year earlier. Both prime and subprime foreclosure rates rose. In fact, 11.81% of the country's subprime loans were in some stage of foreclosure as of the second quarter.

The chart above shows what happens when a housing bubble goes bust. Foreclosure rates have almost tripled from their late 2005 lows, while delinquency rates are at their highest level ever. Lenders, policymakers, and borrowers all share the blame for this mess. And they'll all have to share the pain of the cleaning up process.

Digging into the details, the subprime delinquency rate appears to have stabilized. This is consistent with some of the other reports I've seen. Subprime loans were the first to start coming unglued, so performance will turn there first. Unfortunately (though not unexpectedly), the problem that policymakers and Wall Street once assured us was "contained" to subprime mortgages has proven to be anything but. Delinquency rates on prime loans -- both ARMs and fixed-rate loans -- have now surged to their highest levels on record.

The key culprits behind the surge in delinquencies and foreclosures are clear ...

First, falling home prices. We started slipping into a housing recession in 2007, with sales weakening and for-sale inventory surging. Now, U.S. home prices are falling sharply, and in a broad array of geographic markets.

Second, the slumping economy. The "private recession" in housing is now spreading to the broad economy. Witness this morning's data on the job market: The economy shed jobs for the eighth month in a row in August and the unemployment rate surged to 6.1%, the highest level since late 2003. Lackluster consumer confidence isn't helping. Nor is the tightening of credit standards we're seeing at the nation's banks and mortgage lenders.

If there's a positive worth noting out there, it's that prices are falling fast enough in some markets to begin clearing out inventory. This will eventually get housing supply back in line with reduced levels of housing demand. But this process will take time. I expect the housing market to generally remain weak -- and delinquency and foreclosure rates to remain elevated -- well into 2009 and possibly 2010.