Interest Rate Roundup

Thursday, December 06, 2007

MBA delinquency, foreclosure rates surge in Q3

Nobody who follows the mortgage and housing markets should have expected anything different. But let's be clear about the Q3 delinquency and foreclosures figures that were just released by the Mortgage Bankers Association: They were awful -- across the board. Here are the key points:

* The overall mortgage delinquency rate jumped to 5.59% from 5.12% in Q2 2007 and 4.67% in Q3 2006. This is the worst late payment rate going all the way back to 1986.

* The subprime DQ rate jumped again -- to 16.31% from 14.82% in Q2 2007 and 12.56% in Q3 2007. But it's NOT just subprime loans that are souring. The prime delinquency rate rose to 3.12% from 2.73% in Q2 2007 and 2.44% in Q3 2006.

* The worst deterioration was evident in adjustable rate loans. Prime FRM DQs only rose to 2.54% from 2.25% quarter-over-quarter, while prime ARM DQs jumped to 5.14% from 4.15%.

* Meanwhile, the DQ rate on FHA loans climbed to 12.92% from 12.58% in Q2 2007 and 12.8% in Q3 2007. The DQ rate on VA mortgages rose to 6.58% from 6.15% in Q2 2007 -- but was unchanged from 6.58% a year earlier.

* Mississippi had the worst loan delinquency rate at 10.6%, followed by Michigan (8.34%), Georgia (7.93%) and Indiana (7.88%). Several western states had the lowest DQ rates, including Hawaii (2.68%), Montana (2.79%) and Oregon (2.82%).

* What about foreclosures? More bad news there. The percentage of mortgages entering the foreclosure process climbed to 0.78% in Q3 from 0.65% in Q2 and 0.46% a year earlier. The percentage of overall loans in any stage of foreclosure climbed to 1.69% (shown in the chart above) from 1.4% in Q2 and 1.05% a year earlier. These are the worst readings on record.

* Foreclosure inventory was the worst in Ohio (3.72%), Indiana (3.28%), and Michigan (3.07%). Florida was also relatively high at 2.19%, with Illinois (2.15%) and Nevada (2.15%) not far behind.

What do these numbers show? That mortgage loan performance is awful. The combination of falling home values, tightening lending standards, overextended borrowers, and a slowing economy have all combined to drive delinquencies and foreclosures skyward. We shouldn't be surprised -- over-easy monetary policy, a "hands off" regulatory approach, reckless real estate speculation, and the complete abandonment of prudent lending practices by the mortgage industry created a housing bubble. Now, that bubble has burst -- and we all have to deal with the consequences.

The "Paulson Plan" is an important step that may help some borrowers. So is FHA reform. But ultimately, only the passage of time, less home construction, and gradually falling prices will allow housing supply and demand to come back in line. I suspect we won't see a meaningful rebound in the housing market -- and a noticeable improvement in mortgage credit quality -- until late 2008 or sometime in 2009.


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