Delinquency, Default Rates Creeping Up

Delinquency and foreclosure rates rose across the board in the third quarter, providing further evidence that the housing market is in the process of a much-anticipated correction.

Overall, 4.67% of all home loans were 30 or more days past due on a seasonally adjusted basis at the end of Sept., 28 basis points higher than at the end of June.

Additionally, the number of loans in the foreclosure process stood at 1.05%, up six basis points from the second quarter. The number of loans entering the foreclosure process also rose.

The increases were spread across all major loan types, with subprime credit quality and Federal Housing Administration loans showing the most dramatic rise in overdue payments. The increase was also most pronounced among adjustable-rate mortgages, particularly those made to subprime borrowers, and 13.22% of subprime ARM loans were delinquent in the third quarter, up 98 basis points from the second quarter.

But MBA chief economist Doug Duncan said the increase in delinquencies had been anticipated. "It is important to remember that delinquency and foreclosure rates have been quite low the last two years," he said.

Mr. Duncan also pointed out that the market has responded to the rising credit risk in home loans, with investors in the secondary market demanding higher returns in the form of wider credit spreads, particularly for loans originated in the second half of 2006.

"From our perspective, the market is working. Pricing is reflecting the risk that's in the marketplace and the performance of the loans is as expected," Mr. Duncan told reporters in December.

In addition, the share of the market comprised of subprime loans has gradually risen, to about 12%-13% today, he said. The ARM component has also grown, to about 25% of outstanding home loans.

However, he said there is no evidence that the increasing prevalence of "nontraditional" loans in the market is pushing up delinquencies. In fact, he said most pay-option and interest-only loans are being sold to customers with high credit scores and lower loan-to-value ratios - prime quality borrowers. However, in the alt-A market, low documentation loans are showing some weakness, he said.

Snapshot: Delinquencies Rise Across Loan Types

Loan Type 2nd Q 3rd Q

Prime 2.29 2.44

Subprime 11.70 12.56

FHA 12.45 12.80

VA 6.35 6.58

All Loans 4.39 4.67

Source: MBA. Numbers are seasonally adjusted. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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