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Delinquency Rates Keep Falling

The Mortgage Bankers Association reported declining delinquencies in the first-quarter and projected that delinquencies will continue to fall over the next few years, but not as much as they would have a decade ago due to the increase in the subprime sector of the overall market.

"The seasonally adjusted delinquency rate for mortgage loans in one- to four-unit residential properties was 4.33% in the first quarter of 2004, down 16 basis points from 4.49% in the fourth quarter of 2003," said Doug Duncan, senior vice president and chief economist at the MBA. "On a year-over-year basis, it represents a 52-basis-point decline from 4.85%. In terms of foreclosure inventory, they stand at 1.27%, down two basis points from the previous quarter at 1.29% and 16 basis points lower when compared to one year ago when it was at 1.43%."

The second main point addressed was that there was a decline in short-term delinquencies, which the MBA characterized as loans past due 30 to 59 days. Mr. Duncan believed that this factor contributed to the overall delinquency decrease.

"In the first quarter the seasonally adjusted percentage of loans past due 30 to 59 days fell 13 basis points from 2.89% to 2.76%, while the percentage of loans 60 to 89 days past due decreased three basis points from 0.77% to 0.74%," he said. "Loans 90 days or more past due stayed constant at 0.83%."

The FHA delinquency rate remains higher when compared to the subprime delinquency rate for the second consecutive quarter, according to Mr. Duncan. "The seasonally adjusted delinquency rate for FHA loans at the end of the first quarter was 11.68% compared with the subprime delinquency rate of 11.19%," he noted. "It's not the case that either new foreclosures or foreclosure inventory is as great for FHA as subprime however. FHA new foreclosures stand at 0.93% as compared to 1.99% for subprime. Foreclosure inventory for FHA stands at 2.78% as compared to 5.05% for subprime."

In terms of the context of the housing market going forward, Mr. Duncan was optimistic as the Fed did not change the rate for the entire first quarter. "This rate is important in that it indicates what the Fed is thinking about the current and future economic growth potential," he said. "It sets the economic background.

"Critical to delinquencies and foreclosures, the single most important determinant of delinquency levels and rate changes is employment," he continued. "Payroll job growth totaled 595,000 in the first quarter, a significant increase in employment, which is directly related to the decline in near-term delinquencies. More recently U.S. companies have added 346,000 new jobs in April and the preliminary estimate is 248,000 new jobs in May, which will be a good indicator of where we expect delinquency rates to go in the future."

Business productivity was also on the rise, which will further strengthen the economy. "Non-foreign business productivity increased 3.8% in the first quarter, an increase of 5.5% from the same quarter a year ago," said Mr. Duncan. "The productivity story is continuing to lend strength to the economy. We believe that with job additions at the pace that they are now, that will continue to give a good backdrop for the reduction of delinquencies and foreclosures."

Thirty-year, fixed-rate mortgages stayed historically low in the first quarter ranging from 5.38% to 5.85%, according to the survey. "While the peak of refinancing activity had past, low rates offered some households the opportunity to continue to refinance and improve cash flows, though that opportunity was passing," said Mr. Duncan. "The overall house appreciation slowed during the first quarter after a very large increase in the fourth quarter but was still strong on an annual basis at just under 4%. We expect that there will continue to be house price appreciation going forward.

"Total delinquencies fell to 4.33% from 4.49% in the last quarter, a 16-basis-point decline and a 52-basis-point decline from a year earlier," he continued. "By loan type, seasonally adjusted delinquency rates fell for all loan types. Compared to a year earlier the seasonally adjusted delinquency rate declined 36 basis points for prime loans, 121 basis points for subprime loans, 52 basis points for VA loans and increased three basis points for FHA loans. So, in general across the whole market, the trend is downward both recently, quarter-over-quarter, and over the longer term, year-over-year, with the exception of the continued delinquencies within FHA, which has essentially remained flat."

The main stumbling block was in the subprime category. "Subprime fixed-rate loans delinquency rates increased 18 basis points to 10.68% over the recent quarter," said Mr. Duncan. "The rate for subprime ARM loans decreased 52 basis points to 10.99%. Compared with a year ago, the delinquency rate for subprime fixed-rate loans is down 250 basis points even though it increased from the fourth quarter of 2003. With subprime ARM loans the story is reverse, where they decreased from the fourth quarter of 2003 but increased by 52 basis points from a year earlier.

"By loan type, foreclosure percentage dropped for all loan types in the first quarter," he continued. "The foreclosure inventory rate of prime loans dropped two basis points to 0.53%, for subprime it dropped 58 basis points to 5.05%, for FHA it dropped 15 basis points and for VA the inventory dropped six basis points compared to the previous quarter. When compared to a year ago, foreclosure inventory also dropped for all categories as well."

However, the new foreclosure rate inched up slightly. "The new foreclosure percentage of all loans was 0.46% in the first quarter compared to 0.45% in the fourth quarter of 2003 and 0.1% from a year earlier," Mr. Duncan said. "This is the one category in which we saw an increase year-over-year."

Overall, the outlook was positive and the MBA expects more good news in the coming years. "The summary of all of this is that the core of the mortgage portfolio that is out there is in very good shape and the condition is improving," Mr. Duncan concluded. "In the smaller segments like FHA and subprime, there is more volatility but the vast majority of the portfolio is improving, including the subprime categories both in the inventory of foreclosures and in delinquencies.

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