The Bright Side of Record High Foreclosure Rates

OK, so it's not easy finding the silver lining in the latest quarterly delinquency report from the Mortgage Bankers Association. More loans are past due than at any previous time in the survey's half-century history. Ditto for the ratio of loans in foreclosure - also at a new record. All told, one in nine home loans is delinquent or in foreclosure. And home loans are entering the foreclosure process at three times the rate reported in the second quarter of 2003, when the housing boom was underway.

So, is there any silver lining at all? If you look hard enough, and have a sunny enough disposition to see a glass half full, then there are some glimmers of hope in the latest numbers.

While both the delinquency rate and the foreclosure inventory were up more than 100 basis points from a year earlier in the second quarter, the change from the first quarter is more modest. At 6.41%, the number of loans 30 or more days past due but not in foreclosure was up only six basis points from the first quarter. The foreclosure inventory of 2.75% was up 28 basis points. The foreclosure start rate, at an alarming 1.08%, still is up just seven basis points from the first quarter. MBA chief economist Jay Brinkmann points out that what is driving the current foreclosure crisis is the migration of seriously delinquent loans into foreclosure, but he does not see a surge of new delinquencies.

"The 30-day delinquency category remains below levels seen as recently as 2002," he pointed out in a conference call with reporters.

Largely weak housing markets in two big states, California and Florida, are still driving the overall increase in delinquencies and defaults. It is also being driven by adjustable-rate mortgage products, both subprime and prime. (Remember, most of those payment-option ARMs were made to prime credit quality borrowers.)

But despite the continuing credit deterioration in California and Florida, the vast majority of states saw "relatively little change one way or another," Mr. Brinkmann said. In fact, only eight states had foreclosure rates above the national average (Nevada, Michigan, Rhode Island, Arizona, Indiana and Ohio join the two big truants in that category). That gives us 42 states where the foreclosure rate is below the national average.

Mr. Brinkmann cautions against spending too much time looking for a "bottom" in the national housing market, however.

"Real estate markets are local and some markets are already improving. For example, even Michigan, one of the worst hit markets in the country, has snow gone three quarters with little to no increase in its rate of foreclosures," he said.

It's still tough to see a glass half full in the current situation, but as some markets start to improve, eventually that trend will spread to more troubled markets as well.