Merrill Lynch: Banks Reach 'Uncharted Territory'

Economists at Merrill Lynch, reacting to news that home loan delinquencies and foreclosures reached record highs in the first quarter, say that the banking industry is far from finished with bad-debt write-offs.

Economists Sheryl King and David Rosenberg, in the Merrill Lynch report, suggest that the record foreclosure level and the surge in "serious delinquencies" portend a flood of homes back on the resale market, which "will only add to the deflation in the real estate market."

The foreclosure inventory, at 2.47% of all mortgages outstanding, along with the surge in serious delinquencies, suggests that the foreclosure rate will head yet higher from the record level of the first quarter, they said. That leaves the mortgage industry and investors in mortgage assets facing "uncharted territory," the economists said.

They noted that the data, compiled by the Mortgage Bankers Association, show that 480,000 homes faced foreclosure starts in the first quarter, double the number seen a year-and-a-half earlier in the third quarter of 2006.

"What is of even greater concern is how sharply delinquencies and foreclosures in the prime category are now rising," the Merrill Lynch report said.

Among all prime loans, the overall delinquency rate rose to 3.71%, up 47 basis points from the fourth quarter. Foreclosure starts for prime loans rose 26 basis points to 1.22%. Those are the largest quarterly increases in at least 10 years, Merrill Lynch said.

But the prime delinquency rate pales in comparison to the subprime delinquency rate. Overall, 18.79% of subprime loans were at least 30 days behind on payments in the first quarter, and 4.46% of subprime loans were in foreclosure. While in previous quarters, rising delinquency and default rates were largely related to speculative homebuying with exotic loan products, the first-quarter data suggest that the increase in unemployment to a three-year high is taking a toll as well, Merrill Lynch said. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/