Delinquency Rate Falls
Delinquency and foreclosure rates registered broad improvement in the first quarter, though underlying factors continue to put upward pressure on overdue rates, according to the Mortgage Bankers Association.
Doug Duncan, the MBA's chief economist, said that the first quarter improvement likely does not portend the beginning of a downward cycle in delinquencies. Instead, he still expects to see "modest increases in delinquency and foreclosure rates" in future quarters.
The national delinquency rate dropped 29 basis points between the end of last year and March 31, when 4.41% of home loans were at least 30-days past due on a seasonally adjusted basis, according to the Mortgage Bankers Association. The improvement was widespread, with adjustable-rate and fixed-rate loan types showing improvement across the prime credit spectrum. Only subprime ARMs fared worse than in the previous quarter.
The foreclosure picture also improved, with the percentage of loans in the foreclosure process and the percentage of loans entering foreclosure both declining by one basis point from the fourth quarter.
Mr. Duncan said that brisk economic growth and strong labor markets helped offset trends that are putting pressure on homeowners, such as slowing rates of home price appreciation, the seasoning of the outstanding loan portfolio, high energy prices, and rising short term interest rates.
The MBA anticipates that home sales will decline 10% this year from last year, a factor that could make it more difficult for borrowers trying to sell their homes and payoff their loans in full. "The housing market is slowing, and that will be a contributing factor to the numbers going forward," Mr. Duncan said.
During the first quarter, an average of 176,000 jobs were added per month, according to government statistics. But job growth slowed early in the second quarter.
Going forward, Mr. Duncan said the factors putting upward pressure on delinquency and foreclosure rates remain in place, he said.
Both government-backed and conventional loans showed improvement during the first quarter. The delinquency rate in the troubled Federal Housing Administration portfolio dropped to 12.23% at the end of March from 13.18% at the end of 2005.
However, delinquencies increased among Veterans Affairs guaranteed loans, rising from 6.81% to 6.93%.
Mr. Duncan said that while delinquency rates may well rise in future quarters, he does not expect to see an alarming increase in late payments. He also downplayed the risk associated with controversial, adjustable-rate loan products, noting that about 80% of homeowners either own their home outright or have a fixed-rate mortgage. Most of the borrowers with ARM loans are prime credit customers, he added.
"I don't think people have a full picture of the risk distribution," he said during a conference call with reporters.
Separately, the American Bankers Association also reported that the performance of home-equity loans improved early this year at banks, but the delinquency rate on home-equity lines of credit edged up for the fifth straight quarter. The percentage of closed-end home-equity loans that were past due fell to 1.94% at the end of the first quarter, down 13 basis points from the 2.07% delinquency rate at the end of 2005.
However, the share of HELOCs that were overdue inched up four basis points to 0.55%. That remained the consumer loan category with the lowest delinquency rate in the ABA's quarterly delinquency survey, however.
SNAPSHOT: Recent Improvement in Loan Performance Strongest among Fixed-Rate Products
Loan Type 1st Q '05 4th Q '05 1st Q '06
All Loans 4.31% 4.70% 4.41%
Prime FRMs 2.02% 2.21% 2.00%
Prime ARMs 2.06% 2.54% 2.30%
Subprime FRMs 9.10% 9.70% 9.61%
Subprime ARMs 10.25% 11.61% 12.02%
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