No Foreclosure Relief in Sight

Few experts were expecting much relief from the rising tide of loan defaults in the fourth quarter of last year, but some were surprised by the extent of the continued credit deterioration.

When the foreclosure inventory is added to the delinquency rate, nearly 8% of all homeowners with a mortgage were not making payments in the fourth quarter. And there is little evidence that the default wave has peaked.

The overall delinquency rate in the fourth quarter of 2007, at 5.82% not including the foreclosure inventory, was 87 basis points higher than it had been one year earlier.

The foreclosure inventory, with 2.04% of all loans at some stage of the foreclosure process, stood at a record level. And there's little evidence that relief is in sight. And the percentage of loans entering the foreclosure process also reached a record high, at 0.83%. That was up 29 basis points from the foreclosure start rate one year earlier.

"We don't expect to see the peak in delinquencies or foreclosures until mid-to-late 2008," the MBA's chief economist, Doug Duncan, told reporters last month. (Mr. Duncan recently said he is leaving the MBA to take the top economic post at Fannie Mae).

Once again, the MBA said that adjustable-rate mortgages - especially those to subprime borrowers - drove the increases in overdue payments and foreclosures. And two big states that have seen home values slide, California and Florida, continue to drive the national numbers. Twenty-one percent of the nation's outstanding home loans are from California or Florida, and those states have an even greater market share by dollar volume.

Mr. Duncan said that falling home prices are "clearly the driving factor" behind the bleak foreclosure picture, though he said the magnitude and underlying reasons for rising defaults vary from state to state.

In the industrial Midwest, job losses and population outmigration in Michigan and Ohio have left people who need to sell homes with few potential buyers. The one silver lining is that, barring a full-scale recession, defaults may be peaking in the industrial Midwest, he said.

In states including California, Florida, Nevada and Arizona, Mr. Duncan said that overbuilding and speculative homebuying generated too much supply, which is now depressing home values.

Subprime ARMs, which represent 7% of loans outstanding, accounted for 42% of foreclosure starts during the fourth quarter of last year. Those loans were especially popular in states like California.

"Roughly a third of subprime adjustable-rate loans are late on their payments," Mr. Duncan said during a conference call with reporters.

Moreover, the performance of subprime loans will likely deteriorate further due to adverse selection, he said, as stronger subprime borrowers refinance into prime or government-backed loans and leave the pool of outstanding subprime loans with a riskier profile.

While subprime loans -fixed and adjustable rate - only account for about 13% of loans outstanding nationally in the MBA's delinquency survey, they loom large in some of the states hardest hit by the housing bust, including California, Nevada, Arizona and Florida.

Loose underwriting and declining home values are behind the weak performance of subprime ARMs, Mr. Duncan said. Many were originated with no income verification, with little equity, and reflect the general weakening of underwriting standards that afflicted loans produced in 2005 and 2006, he said.

Noting that many first mortgages were originated along with a home-equity loan in recent years, Mr. Duncan said that loan-to-value ratios are much higher today than they were in the mid-1980s, when delinquency levels last exceeded today's rates.

And there's no guarantee that the 6.07% delinquency rate record set in 1985 won't be exceeded in future quarters.

"As long as house prices are declining, you should expect to see some continued rise in delinquencies and foreclosures," he said.

If the economy slips into a recession, that could make things even worse, he added. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/

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