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Micro, Macro Economic Pressure Brings Serious Delinquency Rate Up

TransUnion data show a trend of progressive, six-quarter improvement in the performance of borrowers 60 days or more past due reversed in the third quarter, increasing the national mortgage delinquency rate from 5.82% in the previous quarter to 5.88%.

While the increase breaks a pattern initiated at yearend 2009, the year-over-year delinquency rate among these borrowers decreased 8.7% from 6.44%.

The findings worry insiders whose expectation was to see the slow, but steady improvement trend continue in 2011.

Reasons for these changes are local and global. According to Tim Martin, TransUnion’s group VP of housing and financial services unit, “relatively more conservative lending policies” combined with some stabilization in home values and employment rates should have had a positive effect on the overall delinquency rate.

But apparently, the counter effect of certain macro economic developments has gotten on the way disrupting the improvements seen for six quarters in a row.

Martin maintains that during the quarter customers were hit with “several unanticipated shocks” such as the U.S. credit rating downgrade, stock price declines, European debt concerns, unemployment and downward pressure in housing prices that diminish customer confidence.

Consequently, especially “underwater” borrowers, whose home values are much lower than their mortgage debt, may be tempted to default or find themselves unable to pay.

In the short run, says Rick Sharga, executive VP of Carrington Mortgage Holdings, the market will play its course despite government efforts to intervene. For example, the new Home Affordable Refinance Program “might have a marginal effect on encouraging” borrowers from missing payments on loans that are resetting in the near term so they have a chance to refinance because that pool of borrowers is not large enough in size “to meaningfully change the delinquency rates."

In addition, he said, the new refinancing guidelines require that borrowers are current on their loans and have not been delinquent in the last 12 months, effectively eliminating “anyone who’s already 60 days or more delinquent from participating for at least the next year.”

TransUnion analysts said they expect the combined effect of these micro and macro economic factors to be temporary. In their view mortgage delinquency rates will start to move downward again in 2012 after one or two quarters of “slightly elevated nonpayment rates.”

The sudden shift in the delinquency rate suggests lenders and servicers need to act quickly, says Fred Melgaard, chief operating officer at DRI.

Both the industry and their consumers “should worry a lot” about the combined micro-macro economic changes bound to affect the market in the future. He argues that since the servicing industry “has not had the investment and capacity planning needed to avoid all the issues,” now is the time to plan, before the next origination boom starts and “the investment momentum” returns to the origination side of the business. Given the continuous troubled economic forecasts, it would also be prudent to advise customers “to rebuild reserves.”

TransUnion said it is conducting a series of ongoing quarterly analysis of how U.S. customers are managing their mortgage, cards and auto credit based on economic assumptions that include gross state product, real estate values, unemployment rates and consumer sentiment.