Foreclosure Rate Edges Down

After hovering at incrementally record levels for almost a year, the percentage of home loans in foreclosure fell in the second quarter, according to data from the Mortgage Bankers Association of America.

The number of loans entering the foreclosure process also declined, and MBA chief economist Douglas Duncan said that while the industry may see a blip up in foreclosures during the fourth quarter, the worst of the recession's impact has probably been digested.

However, the overall delinquency rate - which excludes foreclosures but includes loans that are in the 30-day through 90-day late categories - increased in the second quarter, even though delinquencies were lower than a year earlier.

Most of the second-quarter increase was concentrated in the 90-days-or-more-late category, while the number of loans in the 30-day-late category actually declined slightly.

As of June 30, 4.62% of residential home loans were at least 30 days past due, up 10 basis points from the first quarter.

The MBA's quarterly survey revealed a sharp increase in the already high delinquency rate for government-insured loans and 12.59% of Federal Housing Administration loans were delinquent as of June 30, an increase of 94 basis points during the quarter. The delinquency rate on Veterans Affairs loans increased 35 basis points to 8.24%.

The percentage of prime quality conventional loans that were delinquent edged up four basis points to 3.14%.

On the foreclosure front, the MBA survey found that the number of loans entering the foreclosure process as well as the foreclosure inventory declined in the second quarter.

The percentage of loans in the foreclosure process at the end of the second quarter dropped eight basis points to 1.12% from its record level of 1.20% in the first quarter.

Mr. Duncan said the 10 basis point decline in the foreclosure inventory "is a pretty good-sized decrease," because the foreclosure inventory is less sensitive to quarterly change than other categories covered by the MBA's delinquency survey.

Even among FHA loans, the number of loans in foreclosure declined by 26 basis points to 2.64%.

The rate of loans entering foreclosure fell from 0.37% to 0.32% for all loans, its lowest level since the first quarter of 2001. The foreclosure start rate declined for all loan types.

"The trend in each of those was exactly the same, both loans entering the process and those in the process of foreclosure fell across the board," Mr. Duncan said in a conference call with reporters.

While Mr. Duncan said the overall trend is toward lower delinquency and foreclosure rates, an increase in 90-day delinquencies during the second quarter could lead to a temporary increase in the foreclosure rate during the fourth quarter.

Mr. Duncan attributed the rise in delinquency rates during the second quarter to long-term unemployment, which is taking a toll on some households.

But he suggested the overall trend, in light of his forecast for an improving economy and better job growth later this year, is toward lower delinquency and default rates.

"Contributing to the sluggishness in job growth in the short run is the issue of productivity, Mr. Duncan said in a conference call with reporters. "We've seen huge increases in productivity and that has delayed job growth."

On the other side of the equation, low interest rates allowed many households to refinance and improve their cash flows, relieving budget pressure, he noted.

Not only might that have kept some borrowers stay out of foreclosure, it also allowed some to avoid foreclosure. With interest rates hitting a near half-decade low in late June, a thriving home sales market probably allowed some troubled borrowers to sell their property and avoid foreclosure, Mr. Duncan said.

Not all economists are as upbeat about the outlook for delinquencies and foreclosures as Mr. Duncan, however. Mark Zandi, head economist at Economy.com, said at a recent Fitch Ratings Web conference that he expects mortgage credit quality to deteriorate next year.

Mr. Zandi believes that rising interest rates and slower home price appreciation may push delinquencies up.

The MBA's growing database of subprime loans suggests that this segment of the industry continues to suffer from high delinquencies. While the MBA says its database is not complete and that quarterly changes in the subprime numbers should be taken with a grain of salt, the survey found that 12.99% of loans serviced by subprime lenders were past due in the second quarter, up 59 basis points from the first quarter.

However, that remained well below the year-earlier subprime delinquency rate of 15.67%.

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