FHA's Driving a Substantial Increase in Delinquencies

Federally insured problem loans may soon turn into the new delinquency superstars to replace the mortgages originated at the peak of the home price bubble which, according to insiders, are slowly passing through the system despite procedural and litigation stumbling blocks.

Second-quarter Mortgage Bankers Association National Delinquency Survey data show unless unemployment rates improve in the short term, new delinquencies will feed the foreclosure pipeline, not the foreclosure-to-REO holdup.

By the end of the second quarter 8.44% of all loans on one-to-four unit residential properties were delinquent, driven mainly by new delinquencies. And “a big driver" of the increase, according to Keefe, Bruyette & Woods analysts, is the seasoning of the Federal Housing Administration book of business, which saw very rapid growth in 2009 and 2010.

Seasonally adjusted, the FHA delinquency rates increased 59 basis points to 12.62% from 12.03%, bringing the total percentage of nonperforming FHA mortgages (delinquent or in foreclosure) up from 15.38% to 15.86%. Non-seasonally adjusted delinquencies increased 1.6% from 10.69% to 11.75% and the nonperforming total from 13.87% to 14.86%.

FHA delinquency rates fell in 2010 even though the number of FHA loans outstanding “grew very sharply.”

Analysts argue that these delinquencies that have driven “the meaningful increase” in the overall delinquency rate during the second quarter probably reflect the “normal seasoning” of the FHA portfolio.

While credit risk “resides with the government” since these loans are guaranteed by FHA, KBW analysts wrote, “the moderation in FHA loan growth will likely result in further increases in delinquencies on this portfolio which will likely push up the national averages.”

In fact, the overall delinquency rate increased for all loan types.

The MBA’s chief economist Jay Brinkmann also stressed during a conference call that the downward trend in mortgage delinquencies seen through most of 2010 has stopped. Data show “some signs of worsening,” he said, as the number of newly delinquent loans that as a rule are driven by employment continues to increase in line with the jump in unemployment rates during the quarter.

Data show problem loans originated at the peak of the home price bubble between 2005 and 2007—which represented 30% of all loans and also 65% of the seriously delinquent loans—are slowly passing through the system into some form of resolution.

The serious delinquency rate (loans 90 days or more past due or somewhere in the foreclosure process) declined for the fourth consecutive quarter to 7.85%, down 25 basis points from last quarter and 126 basis points year-over-year marking the lowest level since the first quarter of 2009.

And the main reason, according to the MBA, is because “the vast majority” of these loans were originated before 2008. “The foreclosure problem will ease” since more recent loan originations are performing much better particularly in California, Florida and other states.

“Were there a growing backlog,” the 90-plus-day delinquent category would continue to increase, Brinkmann argued.

It is important “to distinguish between the economic and the legal impediments” to the resolution of the foreclosure overhang in the housing market, he said.

The delinquency rate, which includes loans at least one payment past due but not in the process of foreclosure, is 8.11% if data is non-seasonally adjusted.

Quarter-to-quarter the delinquency rate for mortgage loans increased 12 basis points on an adjusted basis. The unadjusted data show a larger 32 basis points increase in delinquencies from 7.79%.

The percentage of loans in the foreclosure process at the end of the second quarter was 4.43%, down 9 basis points from the first quarter and 14 basis points from one year ago. The combined non-seasonally adjusted percentage of loans in foreclosure and at least one payment past due was 12.54% up 23 bps quarter-to-quarter, down 1.43% year-over-year.

Both the MBA and other industry insiders including KBW are looking more closely at the year-over-year changes of the non-seasonally adjusted data, given the challenges in interpreting the true seasonal effects in the quarter results. Unadjusted data give a clearer picture of the early-stage delinquencies KBW analysts wrote, since delinquency levels “have varied significantly from historical norms” seasonal adjustments are “somewhat problematic.”