Delinquency Stabilization, Taken with a Grain of Salt

Signs of stabilization in the delinquent and foreclosed markets must not be taken at face value since improvements "remain largely neutralized" by the more than 7 million loans in distress.

Deterioration vs. improvement ratios remain high with two loans rolling to a "worse" status for every one loan that fares "better," according to a report by Lender Processing Services Inc., Jacksonville, Fla.

These improvements, deemed "artificial" because they resulted from 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 due to HAMP modifications.

A much more revealing sign of market stabilization, however, 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 as 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.

The tsunami of default risk is still receding based on data for in the spring of 2010, according to the latest UFA Mortgage Report by University Financial Associates of Ann Arbor, Mich.

The UFA Default Risk Index for the second quarter of 2010 has dropped to 182, half the peak level of 362 set in 2007. 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 this cycle (2006-2008).

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

"Although default risks remain elevated, the index is steadily returning to prebubble levels," said Capozza.

"The worst vintages of this mortgage cycle are behind us. However, a return of the default risk index to prebubble levels is still several years away."

The UFA Default Risk Index measures the risk of default on newly originated prime and nonprime mortgages. UFA's analysis is based on a "constant-quality" loan, that is, a loan with the same borrower, loan and collateral characteristics.

The index reflects only the changes in current and expected future economic conditions, which are much less favorable currently than in prior years.