Few Surprises in Delinquencies

The country's most problematic states - California, Nevada, Arizona and Florida - are keeping their lead in "seriously delinquent" mortgages and foreclosures overshadowing a 17 basis point quarter-to-quarter decrease in the fourth quarter overall residential loan delinquency rate to 9.47%.

And the main culprits no longer are subprime or resetting adjustable-rate mortgage loans, but prime fixed-rate loans 90 days or more past due that closely follow the long-term unemployment curve.

The Mortgage Bankers Association fourth-quarter delinquency data show option ARMs have had the highest percentage of loans already modified and performing. A prevalent anticipation that option ARMs at reset will keep delinquency rates up appears to have been a false alarm similar to expectations that subprime ARM resets would turn into a default rate issue, MBA's chief economist Jay Brinkmann said during a conference call. And that's because option ARMs most likely to default at the required reset "probably have been taken care of." His expectation is that option ARMs with feature the same patterns as subprime borrowers that already defaulted before the reset, or never defaulted after the reset. A Royal Bank of Scotland report on the performance of U.S. nonagency residential mortgage-backed securities also maintains that there is concern among RMBS market insiders related to how option-ARM loans will perform when their payment is reset, linked to about $50 billion in outstanding securitized loans from the 2005 vintages that already have started to recast or will do so this year. It is based on fear that the ongoing economic crisis increases the probability that the expected 15% to 20% average increase in payment, or payment shock at recast, affects delinquency rates going forward.

The report stresses that while the performance of the 2005 vintage notes "could vary significantly depending on shelf," Washington Mutual 2005 paper "has performed much better than other shelves of the same vintage, experiencing serious delinquencies that are currently 24% (including foreclosures and REOs) vs. 40% for other option-ARM shelves of the same vintage." Similarly, their serious delinquency rates are lower. The reason, according to the report is because WaMu's 2005 paper was better underwritten, with low first-lien LTVs and a smaller percentage of silent seconds compared to other 2005 option-ARMs and some prime 5/1 ARMs, so WaMu's payment shock at recast is expected to be in the 5% to 10% range.

Long-term unemployment is more and more turning what seemed like a subprime issue into a prime fixed-rate loan problem due to the direct correlation between long-term unemployment and 90-day-plus delinquency rates, Mr. Brinkmann said.

The number of 90-day past due loans is at 50% of all delinquent loans, far exceeding the industry's average of about 20%, which is directly affected by "the changing nature of unemployment," said Mr. Brinkmann, noting that the rate of over six-month unemployment, or long-term unemployment, is higher now than it has ever been since 1948.

He did, however, try to cast a positive light on the overall delinquency rate, calling the slight quarter improvement the possible beginning of the end of the unprecedented wave of mortgage delinquencies and foreclosures that originated with the subprime defaults in early 2007.

In fact Mr. Brinkmann was not the only one who highlighted improvements. Michelle Meyer, an analyst for Barclays Capital, called the decline in new delinquencies and foreclosures "encouraging."

Using MBA's fourth-quarter data, the analyst estimates the quarter-to-quarter decline in the percentage of foreclosures started to 1.2% from 1.42% of outstanding mortgages, while the lowest since the fourth quarter of 2008, MBA's figures for the number of mortgages outstanding translate to just over 600,000 foreclosures started in 4Q, down from roughly 760,000 in 3Q.

She added, however, that despite the decline in foreclosure starts the percentage of mortgages in some stage of foreclosure increased to 4.58% from 4.47%, "there is clearly still a very large foreclosure pipeline, with a record number of mortgages in some stage of foreclosure."

If one compares the seasonally adjusted figures - the seriously delinquent rate does include foreclosures - with nonadjusted figures, it is clear that data reporting also plays a role in the accuracy of these figures and the overall picture one can draw from them. For example, the nonseasonally adjusted numbers show a bleaker picture: 10.44% of all home loans were late by 30 days or more compared to 9.94% in 3Q.

One fact is nonetheless consistent: even though every state has seen an increase in the 90-day-plus delinquency bucket, the same four states are driving the national delinquency average.

Florida leads in problems with prime fixed-rate mortgages, which have increased quarter-to-quarter. And delinquencies are up in all categories. For example, in Florida up to 26% of all mortgages are late by at least 30 days or more.

The MBA report shows that Nevada is ahead of the pack in every loan category except FHA and VA.

Overall, California, Nevada, Florida and Arizona still dominate the number of foreclosure starts, even though their share has dropped from the mid-40% range to 39.2%, mainly due to performance improvements in California's prime ARM loans, Mr. Brinkmann said. Beyond that, the economist stressed that when it comes to ranking in what state the situation is worse, differences are very narrow. Nevada is at the top 10 with 3.4%, while Ohio, where the rate of foreclosure starts is at 1.21%, is the tenth worst state in the nation and just one percentage point above the 1.2% national average.