Performance Outlook Mixed

While the national delinquency rate edged lower in the second quarter, underlying numbers may portend a long-term trend toward higher overdue rates.

Overall, 4.39% of home loans were at least 30 days late at the end of June, down two basis points from the end of March but still slightly higher than one year earlier, according to the Mortgage Bankers Association. Nationally, the percentage of seriously delinquent loans - those 90 or more days past due or in foreclosure - declined four basis points to 1.89% at June 30.

But in a conference call, MBA chief economist Douglas Duncan said that improvement on the Gulf Coast resulted in a "somewhat artificial decline in the national delinquency rate" relative to the first quarter.

But Mr. Duncan said the overall momentum continues to suggest upward pressure on delinquency and foreclosure rates. Mr. Duncan said both the economy and the housing market "decelerated" during the second quarter, with the pace of job growth and home price appreciation slowing. Rising interest rates and a larger inventory of homes for sale have combined to hold down price gains.

After years of record-setting home sales, the MBA expects to see about a 12% decline in the total volume of new and existing home sales this year. Moreover, the MBA has sharply reduced its expectations for home price growth this year to about 3.5%, down from a previous expectation that home prices nationally would rise by 6% or 7%.

In addition, the aging of loans originated during the refinancing boom and higher energy prices also have put upward pressure on delinquencies, even as "generally healthy economic growth and labor markets" have helped keep delinquencies down, Mr. Duncan said.

"However, we are seeing increases in delinquency rates for subprime loans, particularly for subprime adjustable-rate mortgages. It is not surprising that subprime borrowers are more susceptible to these changes," Mr. Duncan said.

The delinquency rate for subprime ARMs rose 22 basis points to 12.24% in the second quarter, according to the MBA. That fueled an increase in subprime delinquencies overall, despite improvement in the performance of fixed-rate subprime mortgages.

Looking ahead, Mr. Duncan said the MBA expects to see "modest increases" in delinquency and foreclosure rates in future quarters. And the share of subprime credit loans has been rising in recent years. In the future, Mr. Duncan said this may prevent delinquency and foreclosure rates from falling as far as they might have fallen in the past.

Separately, the American Bankers Association reported that the performance home equity loans and lines of credit at banks improved during the second quarter.

The delinquency rate on closed-end home equity loans fell five basis points to 1.89% in the second quarter. The delinquency rate on home equity lines of credit fell three basis points to 0.52% as HELOCs remained the consumer credit category with the lowest delinquency rate.

Home equity lines and loans remain among the best performing asset categories in the quarterly ABA consumer credit survey.

Keith Leggett, a senior economist at the ABA, said that the cooling housing market and other factors may put "a little pressure" on the performance of home equity lines of credit, noting that HELOCs typically are variable rate products and payments may adjust upward.

"You may start seeing some fraying at the edges," Mr. Leggett told MSN.

But rather than pushing up HELOC delinquencies significantly, he believes a slowing housing market will slow the growth of HELOC debt, because consumers will have less home price appreciation to withdraw. If home prices actually decline in some markets, that could affect home equity performance, he said.

He said the prospect of rate resets on variable rate home loans and home equity loans will pose a challenge going forward, but he said the slowdown in home price appreciation is not likely to spark higher delinquencies in and of itself. That said, he notes that housing gains have helped the overall consumer credit sector.

"I think the other thing is that consumers don't feel as wealthy as they did a year ago because of double digit gains going away."

Given higher rates and gas prices in the second quarter, Mr. Leggett said overall consumer credit held up better than most expected.

Loan Type 1st Q '06 2nd Q '06

Prime 2.25% 2.29%

Subprime 11.50% 11.70%

FHA Loans 12.23% 12.45%

VA Loans 6.93% 6.35%

Total 4.41% 4.39%

SOURCE: MBA. Note: delinquency = seasonally adjusted percentage of loans 30 or more days past due.

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