Have Prime Delinquencies Passed Peak?

It now appears that residential delinquencies peaked in the middle of last year among 'prime' mortgage loans, but the number of loans in foreclosure remained at a record level as 2002 came to a close.

The Mortgage Bankers Association of America reported last week that 4.53% of home loans were at least 30 days late at the end of 2002, a decline of 13 basis points from the third quarter and also a 14 basis point decline from the end of 2001.

Moreover, it now appears that delinquencies peaked in the second quarter at 4.77% following the recession, according to the MBA. That discounts a slightly higher rate in the third quarter of 2001, when terrorism and anthrax-related mail delays may have skewed the numbers.

If the second-quarter figure holds up as the peak delinquency rate for this cycle, it means delinquencies have peaked slightly lower than they did after the 1990-91 recession, according to the MBA.

Not so for the foreclosure rate, which remains at a record level.

The percentage of conventional home loans that are in the foreclosure process edged up to 1.18%, a three basis point rise from the previous record of 1.15% set in the third quarter.

"It is our view that foreclosures may be peaking at this time," said Douglas Duncan, the MBA's chief economist. He added that it is logical for the foreclosure rate to peak about two quarters after the overall delinquency rate has peaked.

Even on the foreclosure front, the MBA's data included some good news. The number of loans entering the foreclosure process dropped slightly in the fourth quarter, suggesting that foreclosures also may have peaked.

Moreover, not all loans that enter the foreclosure process die there.

"Obviously, a lot of those loans will cure through loss mitigation exercises," Mr. Duncan said.

The fourth-quarter rise in the foreclosure inventory reflected increases for government-backed loans, while the ratio of conventional loans in foreclosure dropped slightly. In the past, HUD officials have suggested that renewed focus on loss mitigation may keep FHA loans in the foreclosure category longer than in the past.

Job losses are a key driver of delinquency rates in recent quarters, Mr. Duncan said. While employment was largely flat in the fourth quarter, he said the MBA is concerned about a decline in jobs that was reported in February. While the MBA doesn't think that this portends an increase in delinquencies, Mr. Duncan said his outlook remains cautious as a result of economic uncertainty.

"There is a concern on our part about what is going on in the employment sector," Mr. Duncan said during a conference call with reporters.

Job growth is crucial to bringing the delinquency rate down, he said. If, as the February report suggested, job losses continue to mount, that will make it more difficult for borrowers to cure delinquencies.

In addition, as home price appreciation slows, mortgage servicers will have fewer options available to help borrowers avoid foreclosure.

So far, Mr. Duncan said the impact of the Iraqi war is uncertain. It may actually be strengthening housing markets by keeping interest rates down as investors seek safe havens from market turmoil.

But the long-term influence of the war remains unclear.

"Obviously, the impact on the economy will feed through to the mortgage sector," he said.

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