Delinquencies Drop, Midterm Expectations Still Low

A higher level of consistency in quarter-to-quarter and month-to-month improvements in the delinquency rate indicate that despite the crippling unemployment, ongoing volatility in housing prices and shadow inventory issues, the overall picture of the housing market in the short to midterm is getting clearer.

Recent industry data reaffirm that while on its way, the long-expected move towards a housing recovery still hangs by a string.

Among others the Mortgage Bankers Association VP of research and economics, Michael Fratantoni, said during a press conference that “more consistent results across products and across geography” is making the industry more confident about survey and study results.

The MBA’s 3Q10 National Delinquency Survey shows that 9.13% of the almost 44 million loans serviced nationally are past due anywhere from 30 days to over 90 days, down from 9.85% in 2Q10 and a decrease of 51 basis points from one year ago.

This “significantly large decline” in the delinquency rate was lead by a decline in the 90-plus-day category as the percentage of loans 90 days or more past due or in the process of foreclosure was 8.7%, down 41 bps from 2Q10 and 15 bps from 3Q09.

That gain “was offset somewhat” by an increase in the foreclosure start rate as 33 states saw increases year over year with the largest increases coming in Washington, Indiana and South Carolina.

According to Fratantoni one of the most important trends that shows change in the composition of the market is a jump in the delinquency rate of primary loans that was never before seen during the 12 years the MBA has been conducting the survey. It is significant for the future performance of the market that the number and proportion of prime fixed and FHA loans which currently make up almost 78% of loans outstanding “now account for more than half of the foreclosures started in the quarter, compared to 39% a year ago."

Similarly, Fratantoni said, gains due to declines in the foreclosure inventory rate will stall and temporarily reverse “due to some of the documentation issues.”

Newly consistent in the housing market is that small gains are easily offset the same as the steady increase in foreclosure starts counterbalances decreases in the number of overall delinquencies and foreclosures.

The percentage of mortgage loans on one-to-four unit residential properties on which foreclosure actions were started during the third quarter increased 23 bps from last quarter to 1.34%, offsetting previous gains but nonetheless performing better (down 8 bps) than one year ago.

While the percentage of loans in the foreclosure process at the end of the third quarter was 4.39%, down 18 bps from 2Q10, and down 8 bps from 3Q09, “bringing the serious delinquency rate to its lowest level since the second quarter of 2009.”

Since the job market “improved only marginally” during the quarter and “the unemployment rate will be little changed over the next year,” Fratantoni expects only modest improvements in the delinquency rate.
However, in his view, improvements in their performance, loans that are 90 days or more delinquent, represent the largest proportion of delinquencies, “still almost four times greater than the average of about 1.1 % over the past 20 years.”

Unless the U.S. economy generates an average of 100,000 new jobs every month, which is considered the benchmark or necessary growth to balance out job losses, unemployment will continue to slow down the housing market recovery, he said. People are “still losing their jobs and losing their homes” all of which will keep an upward trend for the medium term.

At the same time, roughly 4.2 million homes are in a state of foreclosure, down from 5 million the last quarter. Another 4.4 million properties currently in the shadow inventory also will enter the market in the coming years.

CoreLogic’s chief economist Mark Fleming warned recently that a weak housing demand combined with the “likely to persist” growing shadow inventory and the “highly extended time-to-liquidation” servicers are now facing is bound to pressure down home prices.

The CoreLogic analysis of August data showed the number of properties that are not yet for sale in the market, or the so-called shadow inventory—properties over 90 days behind in payments, already in foreclosure, or repossessed by banks—is estimated at 2.1 million.

Added to the 4.2 million homes for sale it brings the total for sale inventory to 6.3 million units, up from 6.1 million in August 2009, which according to some market insiders represents 23 months of inventory supply that will continue to negatively affect the mortgage market in the next couple of years.