Falling Delinquencies Suggest Worst Is Over

The number of homeowners who are behind on mortgage payments declined in every major category during the third quarter of last year, according to the Mortgage Bankers Association of America.

While serious delinquencies remain stubbornly high among government-backed loans, even FHA and VA loans improved in the third quarter of last year. The same was true for subprime loans, according to the MBA's initial data on the lower credit quality side of the industry.

Overall, the MBA National Delinquency Survey found that 4.66% of borrowers were at least 30 days past due on their mortgage in the third quarter of last year, down from 4.77% in the second quarter. The third-quarter figure was also an improvement of 17 basis points from a year earlier.

Doug Duncan, senior vice president and chief economist at the MBA, said that the MBA now believes "delinquencies have peaked" and that the housing market will continue to contribute to an economic recovery that seems to be gaining momentum.

"We believe that going forward there will be fewer households facing the harsh economic reality of unemployment that helped to drive up delinquencies and foreclosures in the first two quarters of 2002," he said.

The improvement was especially strong in the number of loans that were between 30 and 60 days past due, Mr. Duncan said. The number of loans entering foreclosure was largely flat in the third quarter. A 14 basis point decline in the number of loans that were 30 days delinquent offset a slight increase in the number that were 90 days or more past due. The number of delinquent loans in the 60-day category was unchanged.

Even in the troubled FHA and VA sector, where delinquencies have risen to historically high levels, the overall rate fell by 19 basis points for each category, to 11.62% for FHA loans and 7.81% for VA loans.

However, the number of government-backed loans that are seriously delinquent continued to rise. According to the survey, 2.50% of FHA loans were at least 90 days past due, up 10 basis points from the second quarter. An additional 0.81% entered the foreclosure process, according to the MBA.

And HUD's own numbers show that the default rate on FHA mortgages remains historically high, with the FHA default rate hitting 4.637% last fall. The FHA's default rate as a share of loans insured has hovered above the 4% mark for 15 straight months.

Among VA-guaranteed loans, 1.67% were 90-plus days past due, up five basis points from the second quarter. The number of VA loans entering foreclosure dipped by three basis points to 0.46% in the third quarter.

Mr. Duncan said that the overall decline in delinquencies, concentrated in the 30-day category, is consistent with an improving economy and is similar to the performance seen as the 1990-91 recession was ending.

"These are modest declines. That's not surprising considering the context of the economy in the third quarter," Mr. Duncan said in a conference call with reporters.

He said the drop in 30-day delinquencies is likely indicative of which direction delinquency rates are going.

Mr. Duncan said the MBA decided to break out figures for subprime credit quality loans because they have been growing as a share of the survey's total. In 1998, predominantly subprime lenders accounted for 1.8% of the survey sample. In late 2002, they accounted for 3.6% of the total. However, the trade group cautions that its subprime data may not be representative of the entire industry at this point, and the MBA is adding additional subprime lenders to its survey for future reporting periods.

In the third quarter, the delinquency rate for subprime loans in the survey was 14.28%.

Because some of the participating subprime lenders specialize in particularly high-risk and high-delinquency loan products, he believes that the addition of more subprime lenders will likely reduce the delinquency rate on B&C loans in the survey.

But Mortgage Servicing News' own quarterly survey of subprime lenders also shows a high rate of delinquency on lower credit quality product. The MSN Quarterly Data Report shows that 13.39% of subprime loans were past due in September. The Quarterly Data Report also found that 2.41% of subprime loans were at least 90 days past due, while the foreclosure rate was 2.95% in September.

And LoanPerformance, a San Francisco-based firm that tracks subprime mortgage performance, contends that the serious delinquency rate on subprime credit quality mortgages nearly doubled between October of 1999 and October of 2002. In late 1999, LoanPerformance reported that 4.64% of subprime mortgages were at least 90 days past due or in foreclosure. By October 2002, LoanPerformance pegged that figure at 8.07%.

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