Servicers Brace for Default Surge
The delinquency rate for single-family home loans jumped by 28 basis points to 5.12% in the second quarter of this year, and the number of loans entering foreclosure reached an all-time high, according to the Mortgage Bankers Association's quarterly delinquency survey.
And that, according to MBA chief economist Doug Duncan, is putting a strain on loan servicers. Moreover, conditions may get worse before they start to improve, he said.
"I think clearly the most expensive activity in loan servicing is the management of delinquencies and foreclosures, and we have seen a significant rise in those costs in the operating data in our surveys of peer groups," he told reporters on a telephone call after the MBA released the most recent delinquency figures.
Firms that service subprime ARMs, which have seen the most dramatic deterioration in loan performance, have already started beefing up on default management and loss mitigation staff, he said.
The problem facing the industry is that because of the long boom in housing, delinquencies and defaults have been at historically low levels for some time. As a result, there are not a lot of people with default management experience "sitting on the sidelines" waiting to be hired, Mr. Duncan said.
"There is no question that firms have been working feverishly attempting to get additional staff," he said.
The rate of loans entering the foreclosure process, at 0.65% on a seasonally adjusted basis, is up seven basis points from the first quarter and 22 basis points from one year earlier. The foreclosure start rate is at an all-time high for the delinquency survey.
Moreover, he said the MBA now believes that we have not reached the peak of this delinquency cycle. He said it is unlikely that housing markets will begin to improve soon, predicting that a turnaround in the housing sector is still two to four quarters away.
The national foreclosure inventory was also up markedly, with 1.4% of all outstanding loans in the foreclosure process at the end of the second quarter, up 12 basis points from the first quarter, according to the quarterly delinquency survey of the Mortgage Bankers Association.
Compared to one year earlier, the increase in both delinquencies and foreclosures was even more dramatic. The delinquency rate is 73 basis points higher than it was 12 months earlier. The foreclosure rate is up 41 basis points from the second quarter of 2006.
The MBA said that increases in past due rates for adjustable-rate mortgages substantially exceeded the increases.
Mr. Duncan also said that the national increase in overdue loans largely reflects increases that are taking place in seven large states. Three are Midwestern states that have been hit by heavy job losses in the manufacturing sector and four are Sun Belt states where many investors purchased homes and many borrowers took out adjustable-rate mortgages.
In Michigan, more than one of every 100 home loans had foreclosure action taken during the first quarter. In Ohio, the percentage of loans more than 90 days past due or in foreclosure remains more than twice the national average.
Mr. Duncan said that California, Florida, Nevada and Arizona also are big factors driving the national increase in overdues. Those four states account for more than one-third of the ARM loans outstanding nationally.
Moreover, Mr. Duncan said that special circumstances in these four states "will likely make things worse." Home values are declining, making it more difficult for borrowers to refinance loans as they reset to higher payment levels. The inventory of homes for sale in the West is at an all-time high, suggesting that improvement in housing markets is still some time off.
Investors are one reason serious delinquencies have risen in some "hot" markets like Phoenix, Las Vegas, Miami and Southern California. The MBA said that non-owner-occupied homes accounted for 32% of defaults in Nevada, 25% in Florida, 26% in Arizona and 21% in California. That compares with 13% in the rest of the nation.
Mr. Duncan said the problems in these states will continue, and that will continue to put upward pressure on national delinquency and default rates, but he said this does not represent "a national problem."
Another underlying problem for the industry is the deteriorating performance of ARMs, particularly those made to subprime credit quality homeowners. While the serious delinquency rate on fixed-rate loans was pretty flat between the first and second quarters, subprime ARMs saw serious delinquencies increase by 227 basis points. Mr. Duncan noted that California, the nation's most populous state, has 17% of the nation's subprime ARM loans. He said because teaser rates generally expire within three to six months after loan origination, the impact of rate resets from teaser rates expiring has already been felt on the ARMs originated during the heady days of 2005 and 2006. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com/