Distressed Loans and New Delinquencies Cloud Stabilization

Lender Processing Services Inc., Jacksonville, Fla., has added yet another report that shows "signs of stabilization" that must not be taken at face value since improvements in home delinquency and foreclosure rates "remain largely neutralized" by the more than 7 million loans in distress.

Deterioration vs. improvement ratios remain high as two loans roll to a "worse" status for every one loan that fares "better."

These improvements deemed "artificial" because they resulted from the government intervention efforts like the Home Affordable Modification Program are more an indicator of political success rather than economic. Between March and April, the number of loans 90 or more days delinquent-including presale foreclosure-declined by 112,184 to 4,074,443.

The total number of noncurrent U.S. loans, which combines foreclosures and delinquencies as a percent of active loans in that state, plus REO, reached just over 7.3 million when extrapolated to represent total mortgage market.

The overall volume of loans moving from delinquent to current status declined to a three-month low supported primarily by HAMP modifications.

A much more revealing sign of market stabilization may be the fact that newly delinquent loans that were current at yearend and 60 or more days delinquent as of April declined from the 2009 levels "but still remain extremely high from a historical perspective, particularly within prime product."

These findings are in line with MBA first-quarter data showing unprecedented defaults in prime loans.

The LPS Mortgage Monitor Report shows another positive development. Only eight states still exceed the foreclosure inventory national average.

If one were to equate the positive and the negative findings mathematically the scale would stay put at zero gains.

The report shows the total U.S. loan delinquency rate is at 8.99%, the foreclosure inventory rate at 3.18% and the total U.S. noncurrent loan rate at 12.17%.

States with the most noncurrent loans were Florida, Nevada, Mississippi, Arizona, Georgia, California, Illinois, New Jersey, Michigan and Rhode Island. States with the fewest noncurrent were North Dakota, South Dakota, Wyoming, Alaska, Montana, Nebraska, Vermont, Colorado, Iowa and Minnesota.

Given that statistically the size of data pools is proportional with the findings' accuracy levels, it is important to note that the LPS repository of loan-level residential mortgage data and performance retrieves information from nearly 40 million loans across the spectrum of credit products.

Other research on pools of newly originated prime and nonprime mortgages indicate there are fewer clouds in the horizon of default risk.

The latest UFA Mortgage Report by University Financial Associates of Ann Arbor, Mich., based on spring 2010 data finds default risk continues to recede. The UFA Default Risk Index for the second quarter of 2010 dropped to 182, half the peak level of 362 set in 2007.

The index also shows that under current economic conditions, investors and lenders should expect defaults on loans currently being originated to be 82% higher than the average of loans originated in the 1990s, but much less than the worst vintages of the 2006-2008 loan cycle.

If, as some observers expect, inflation spikes due to excessive monetary ease, nominal house prices will be higher and defaults will be lower, says founding principal of UFA Dennis Capozza.

He also warns that while "the worst vintages of this mortgage cycle are behind us" a return of the default risk index to prebubble levels still is "several years away."