FHA Overdues Top B&C

The delinquency rate on Federal Housing Administration loans is higher than the subprime mortgage delinquency rate for the first time, according to data collected by the Mortgage Bankers Association.

As of Dec. 31, 12.23% of FHA-insured loans were at least 30 days past due, up 10 basis points from the third quarter. By contrast, the seasonally adjusted delinquency rate for subprime loans declined 110 basis points to 11.59% at the end of last year.

Moreover, the percentage of FHA loans in the foreclosure process rose from its third quarter record high to set a new record at 2.93%, as industry sources expressed concern about the impact of adverse-selection on the FHA insurance pool.

In a rare bright spot for the FHA, the percentage of loans entering the foreclosure process during the fourth quarter decreased seven basis points to 0.91%, according to the MBA.

Doug Duncan, chief economist of the MBA, said a number of factors have contributed to the deterioration in FHA credit quality, as well as the improvement registered in the MBA's increasingly robust subprime loan database.

In a conference call with reporters, Mr. Duncan said the FHA's credit quality has suffered from advances in private sector underwriting that have allowed conventional lenders to compete for loans that may have gone to the FHA in the past. Automated underwriting has been a key factor in this development.

"Some of the better customers are not ever making it into the FHA pools," he said.

In addition, home price appreciation has allowed many FHA borrowers to refinance at more attractive terms into conventional loans, because their loan-to-value ratios have declined as home values have risen.

At the same time, as the nonprime lending industry has evolved, lenders have improved risk assessment, product development and pricing, all in ways that may be reducing delinquencies. Stabilization of the employment market as the economy improves has also boosted the performance of subprime loans, he said.

"The nonprime piece is a relatively young market. You can think of it as having been born at the end of the 1993 refinancing boom," Mr. Duncan said, noting that only a few niche firms served the market before that time.

While the overall delinquency rate on home loans improved in the fourth quarter of last year, the number of loans in foreclosure edged up again, according to a quarterly delinquency survey compiled by the Mortgage Bankers Association.

Still, Mr. Duncan said the numbers paint a positive picture of the mortgage industry's credit quality. Delinquency rates are declining from their post-recession peaks and the combined levels of home purchases and increases in home prices point to a sound housing market, he said.

Overall, 4.65% of home loans were at least 30 days past due in the fourth quarter, down 16 basis points from the third-quarter number. But an additional 1.24% were in the foreclosure process, an increase of five basis points. The number of loans entering foreclosure ticked up one basis point to 0.44%, the MBA said.

The MBA has revised its historical delinquency database to make it consistent with the growing number of subprime loans outstanding. In the fourth quarter, the MBA more than doubled the number of nonprime loans in its survey and revised historical figures based on the new database.

Overall mortgage delinquencies are at their lowest level since the second quarter of 2000, when the rate was 5.51%, according to the revised data. Regionally, the overall delinquency rate declined in all four U.S. Census regions during the fourth quarter, the MBA said.

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