Experts Foresee Pressure on Credit

With delinquency rates edging up at the end of last year, economists warn that lenders should be prepared to see loan problems continue rising in the near term despite a strong economy.

A study by PMI Mortgage Insurance finds that the likelihood of a drop in home prices has increased in 48 of the 50 largest metropolitan areas in the U.S. (See related story, page 9.)

Brian Carey, an economist with Moody's Economy.com, said that slowing home price appreciation is mixing with other factors to weaken what has been a historically strong credit quality environment in recent years. And with interest rates rising, Mr. Carey told MSN that borrowers with adjustable-rate mortgages may feel payment shock when their loans adjust. Economy.com projects that 30-year mortgage rates will reach 6.9% by the end of the third quarter, up substantially from a 6.2% average in the first quarter. "I think three is going to be upward pressure on delinquency rates," he said.

He believes, as do many economists, that home price appreciation is slowing down. Until recently, robust gains in home prices helped hold down default rates.

The markets most at risk of a price decline are the ones where affordability is limited at today's home prices, he said. Southern California cities, as well as markets in the Northeast such as New York and Boston, are vulnerable because huge price gains in recent years have pushed many potential buyers out of the housing market.

And mortgage delinquency data for late last year show that indeed, credit quality is starting to show some fissures.

Nearly a quarter of home loans in Louisiana were past due at the end of December. In Mississippi, the delinquency rate was 17.4%. And while the least serious category of delinquencies - those between 30 and 60 days past due - has fallen since September, the number of loans that are 90 days or more past due has increased.

But the MBA's quarterly delinquency survey shows that Katrina is just one factor pushing up delinquency rates nationally, according to MBA chief economist Doug Duncan.

"We have been expecting an up tick in delinquencies due to a number of factors: the seasoning of the loan portfolio, the increased shares of the portfolio that are ARMs and subprime mortgages, as well as the elevated level of energy prices and rising interest rates."

Mr. Duncan told reporters that the effect that Hurricane Katrina's impact on the Gulf Coast has on the overall data "simply magnifies the underlying trend in the national data."

He said that the MBA expects to see continued upward pressure on delinquency rates nationally for the next few quarters because of these trends and the continuing impact of Hurricane Katrina.

At the end of last year, 4.7% of home loans were at least 30 days past due nationally, up from 4.38% a year earlier. The delinquency rate increased for all loan types except VA loans.

The delinquency rate on FHA loans increased 95 basis points over the course of last year and stood at 13.18% at Dec. 31.

When the impact of Hurricane Katrina is removed from the data, the overall delinquency rate for all loans would have been 4.55% in the fourth quarter, the MBA said.

As might be expected in a rising rate environment, the delinquency rate for adjustable-rate mortgages has risen more than for fixed-rate mortgages.

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