Current, Expected Delinquency Rate Improvements Remain Weak

Weak overall improvements in the delinquency and foreclosure rate during the third quarter point to weak near-future improvement expectations.

The seasonally adjusted data reported by the Mortgage Bankers Association Delinquency Survey for the third quarter show a slight decrease in the delinquency rate on one-to-four unit residential properties to 7.99%, down 45 basis points from the previous quarter and 114 bps from the same quarter in 2010.

It marks the lowest level since the fourth quarter of 2008. If, however, the delinquency rate is not adjusted, it climbs to 8.2%, up from 8.11% during the second quarter.

Similarly, the combined percentage of loans at least one payment past due or in foreclosure was 12.63% on a non-seasonally adjusted basis, up 9 bps from 2Q11, down 115 bps from 3Q10.

“We are not out of the woods yet,” cautioned MBA's VP of research and economics, Michael Fratantoni, upon the release of the report. Foreclosure data indicate “the issues continue to vary by geography” as different trends drove this quarter's change for the better in the delinquency picture.

Fratantoni reiterated, “although at a slow pace” continued improvements in the better-performing states will depend on the overall economy and the job market. The current pace of improvement indicates the market is “three to four years away from getting back to that more typical level of seriously delinquent loans,” he said during a conference call.

Expectations are based on statistics showing mortgage banks “haven't made a real subprime loan since 2007,” said Joel Kan, MBA's director of economic forecasting, so all the subprime loans that appear in the data are older loans. These loans, that represent about 24% of all loans, reached their peak default rate in 2009.

Analysts are also watching the mixed performance of FHA loans, which improved if one looks at the seasonally adjusted set of data and deteriorated if the data is not seasonally adjusted.

Keefe, Bruyette & Woods analysts also called the findings “modestly positive” noting the unadjusted raw data showed a 35-40 bp quarter increase in total delinquencies was “below the typical 3Q seasonal increase.”

Analysts worry, however, that the increase was driven by FHA loans. Seasonally adjusted FHA delinquency rates decreased 53 bps to 12.09% from 12.62%, while unadjusted delinquencies increased to 12.66% from 12.13% and to 15.93% from 15.37% after including loans in foreclosure. Even though the increase may “reflect normal seasoning of the portfolio,” they wrote, since in 2010 as delinquencies fell the FHA loans outstanding grew very sharply, the moderation in FHA loan growth this quarter “will result in further increases in delinquency rates as the portfolio seasons.”

It still is a challenge to assess the real number of the total number of delinquencies and foreclosures. Over the past couple of years due to “very active loss mitigation” measures taken, in many cases foreclosures where started and stopped multiple times, Fratantoni said, making it difficult to number the households that have been impacted. 

What is clear is that when it comes to the seriously delinquent loan rate, the market is “in the downhill side of the mountain,” Fratantoni said. But while the MBA anticipates “continued, moderate” overall economic and job growth through 2012, it may not be fast enough to bring the unemployment rate further down from the 9% average that it is today.

In 2012, same as during the third quarter, at least “another quarter or two” may similarly feature significant transfers of loans from the 90 days or more delinquent category into foreclosure. If job growth expectations come true, Fratantoni said, “These problem loan categories are to continue to decline.”

The number of loans 90+ days delinquent peaked at 5% and has now dropped to 3.5%, which is another 2.5% higher than “the quote unquote normal range of 1%,” he said.