Delinquencies on the Decline, FHA Problematic

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It appears that residential delinquencies are headed in the right direction—down—but the jury is still out on how improving late payments are affected by government modification programs and delays caused by the robo-signing settlement.

The delinquency rate on all outstanding residential mortgages fell to a three-year low in the fourth quarter with most loan types improving except for one product: FHA.

According to figures compiled by the Mortgage Bankers Association, the national delinquency rate—excluding foreclosures—dropped to 7.58% at Dec. 31, the lowest reading since the fourth quarter of 2008 when the rate was 7.88%.

National Mortgage News estimates that roughly $700 billion of home mortgages are currently in arrears, not including foreclosures. Consumers owe $9.23 trillion on their one-to-four family loans.

Late payments peaked in the first quarter of 2010 at 10.06%.

The trade group noted that the outlook for severely delinquent loans improved slightly in 4Q with 0.99% of loans entering foreclosure during the period compared to 1.08% in 3Q and 1.27% a year ago.

The delinquency rate on subprime loans improved to 20.83%, the best reading since the third quarter of 2008, MBA said.

FHA loans, on the other hand, are getting worse: delinquencies rose to 12.36% at yearend compared to 12.09% in the third quarter and 12.27% a year earlier. Moreover, the inventory of FHA foreclosures rose to 3.54% in the fourth quarter, the highest reading since the second quarter of 2010.

There is a growing concern in Washington—and the mortgage industry—that FHA may need to tap a line of credit it has with the U.S. Treasury to keep its mortgage insurance fund in the black.

MBA chief economist Jay Brinkmann said, “Mortgage performance continued to improve in the fourth quarter, reflecting the improvement we saw in the job market and overall economy.”

Brinkmann noted that a big reason for the progress in late payments is tied to vintages: “…loans that are seriously delinquent are predominantly made up of loans originated prior to 2008 and this pool is steadily growing smaller as a percent of total loans outstanding.”

Still, many mortgage bankers and economists wonder where the nation is in terms of a true recovery. Programs such as HARP and HAMP have helped but fallen short of their initial goals. Brinkmann notes that figuring it all out is hardly easy.

The 2011 yearend report shows “by several measures” that mortgage delinquencies are “about halfway back to long-term, pre-recession levels,” he said.

Also, the mortgage delinquency rate is falling “faster than the unemployment rate is declining,” Brinkmann said.

Despite the drop in delinquencies and foreclosure starts, at 4.4% the percentage of loans in foreclosure is still much closer to the all-time high of 4.6% reached in 4Q10 and higher than the longer-term average of roughly 1.2%.

Local conditions and legal structures play a major role. In states with nonjudicial foreclosure systems the backlog of foreclosures is clearing faster. It is now down to an average rate of 2.8%, compared to the all-time high of 6.8% in the judicial system states.

Ultimately, the robo-signing settlement may cause some decreases in the foreclosure inventory, Brinkmann said. In his view “the issue is not so much about filing the initial foreclosure actions” as it is about moving properties to a foreclosure sale or an REO, and that may eventually result in “some speeding up” of the process.

Before that, however, “there may be a temporary increase,” due to certain process change requirements, he said. “We might see an upward tick first and than a little more of rapid exit later on, so we’re probably not going to see much, in terms of an increase in the cure rate.”

Asked whether there is any indication HARP helped decrease the 60-day delinquency rate reported in the fourth quarter, or may aid in refinancing activity, MBA’s Mike Fratantoni responded it could, but only to some degree.

Figures show “strong refinancing application volume right now,” he said, with roughly 10% to 20% being facilitated by HARP and HARP 2.0. The HARP incentives require applicants be current in the past six months and no more than one past due over the past 12 months.

But it’s difficult to quantify the actual effect of HARP in the delinquency figures. “It’s just not enough to show up in the real numbers, compared to everything else that is probably driving those delinquencies,” said Brinkmann.