Interest Rate Roundup

Thursday, September 06, 2007

MBA: Delinquency, foreclosure rates rise in Q2

Every quarter, the Mortgage Bankers Association releases a report on mortgage delinquencies and foreclosures. It covers prime, subprime, and government-backed mortgages, including FHA and VA loans. Not surprisingly, given what we know about the state of the housing market, the second quarter figures show deterioration in most categories. Let's get to the numbers ...

* The share of loans on which lenders began foreclosure proceedings climbed to 0.65% in Q2 2007 from 0.58% in Q1 2007. That is a fresh record high -- a disturbing development considering the MBA has been tracking the market since 1972.

* The overall foreclosure rate (which includes loans in foreclosure already AND those entering the process) rose to 1.4% in Q2 2007 from 1.28% in Q1 2007 and 0.99% in Q2 2006. That's the highest for this series since Q1 2003, when it was 1.43%. The high, for perspective's sake, was 1.51% in Q1 2002.

* The overall delinquency rate reversed the first quarter's minor improvement -- and then some. Some 5.12% of the country's mortgages are now delinquent, up from 4.84% in Q1 2007 and 4.39% in Q2 2006. That's the highest DQ rate since Q2 2002.

* By loan type, prime mortgage delinquencies increased to 2.73% in Q2 2007 from 2.58% in Q1 2007 and 2.29% in Q2 2006. That's the worst reading since Q3 2001 (2.85%). DQs on subprime loans jumped to 14.82% in Q2 2007 from 13.77% in Q1 2007 and 11.70% in Q2 2006. That's second only to the 14.96% rate in Q2 2002. Worth noting: DQs increased on both fixed-rate mortgages and adjustable-rate mortgages, in both the prime and subprime categories. The increases were much smaller in FRMs, however.

* Meanwhile, FHA delinquencies ticked up to 12.58% in Q2 2007 from 12.15% in Q1 2007, while VA delinquencies dipped to 6.15% in Q2 2007 from 6.49% in Q1 2007. Both types of loans have lost a ton of market share in the past few years, supplanted by private lenders in the subprime and Alt-A markets.

The delinquency and foreclosure figures from the MBA confirm that credit quality is deteriorating. I blame several forces ...

- Home prices are declining in many parts of the country. A quarterly home price index compiled by S&P/Case-Shiller, for instance, showed prices declined 3.2% year-over-year in the second quarter. That was the worst decline since the firms started collecting data in 1987. As a result, we're seeing more mortgage holders "upside down" -- owing more than their homes are worth. Those borrowers have an economic incentive to resort to "jingle mail" -- sending their keys back to their lenders and walking away.

- Mortgage lending standards started tightening up earlier this year. That made it tougher for stretched borrowers to refinance. This trend has only accelerated since the second quarter ended, meaning we'll see even more pressure on borrowers in the coming quarters.

- For-sale inventory has skyrocketed. We now have a whopping 4.59 million single-family homes, condos, and co-ops on the market, according to the National Association of Realtors. That compares with just 2 million to 2.5 million in the late 1990s and early 2000s. We have a longer history of data in the single-family only market, and the numbers there are equally grim. On a months supply at current sales pace basis, there were 9.2 months of SFH inventory on the market in July. That's the most since late 1991.

With so much supply out there to compete against, borrowers who can't pay their mortgages are behind the 8-ball. They can't sell to get out from under their obligations. As a result, more end up tumbling into foreclosure.

Where do we go next? Well, so far, the housing market has been in what I'd call a "private recession." Mortgage lenders, home builders, construction suppliers, and other related firms have been hit hard. But the overall economy has hung in there.

That may change if the job market starts deteriorating, as it seems to be doing. Outplacement firm Challenger, Gray & Christmas said layoff announcements jumped 22% from a year ago in August. And the payroll processing firm ADP said the U.S. created just 38,000 private sector jobs last month. That was the fewest since June 2003.

The bottom line: Delinquency and foreclosure rates will likely get worse before they get better. That, in turn, will keep the pressure on the housing market as foreclosed inventory gets added to the long list of homes for sale.


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