FHA Leads in Overdues
Overall, delinquencies edged up a bit in the second quarter of this year, according to the MBA. But some loan types faired better - and worse - than others.
The Federal Housing Admin-istration delinquency rate jumped up after cooling off in the first quarter, while subprime delinquencies continued to decline nicely.
So much so, in fact, that the FHA delinquency rate now has exceeded the subprime delinquency rate for three consecutive quarters.
In addition, the subprime credit quality share of the mortgage market seems to be growing, according to Douglas Duncan, chief economist of the MBA.
But most of the news is good in the subprime credit market. Subprime delinquencies fell dramatically in the second quarter. The delinquency rate among lenders servicing the subprime market fell 115 basis points between the first and second quarters and stood at 10.04% at June 30. The subprime delinquency rate was 295 basis points lower than it had been a year earlier.
By contrast, the Federal Housing Administration delinquency rate bounced back up 84 basis points in the second quarter to 12.52% in the second quarter. The MBA was quick to point out that the FHA delinquency rate fell sharply in the first quarter and remains slightly lower from a year earlier.
The FHA delinquency rate has exce-eded the subprime delinquency rate for three quarters.
Mr. Duncan said the FHA's book of business has been hurt by a number of factors, such as the advent of automated underwriting, which has allowed the conventional market to take some of the FHA's stronger customers.
And conforming lenders may not be the only ones that are cherry picking the best FHA prospects.
"It is also possibly true that the subprime market, which is now about nine years old, has gotten much more economically efficient and is now competing with the FHA," Mr. Duncan said.
In addition, low interest rates and rising home values have allowed some FHA borrowers to refinance into less expensive conventional loans.
Overall, the delinquency numbers point a mixed picture of credit conditions for the residential home loan market.
Mr. Duncan points to the fact that the overall delinquency rate, with 4.43% of home loans at least 30 days past due as of June 30, remains 54 basis points below its level a year earlier. And the inventory of loans in the foreclosure process dropped in the second quarter to 1.16%, down 11 basis points from the first quarter and 19 basis points from one year earlier. This comes despite a 10 basis point uptick in delinquencies from the first quarter.
Mr. Duncan said that despite rising home prices in many regions and continued evidence that the economy is expanding, he believes the "small upward blip" in second-quarter delinquencies is not worrisome.
Instead, he told reporters during a conference call last week that the MBA expects a "modest downward trend in delinquencies" to continue in future quarters.
In part, this reflects a growing economy and strong housing markets. New and existing home sales are expected to reach record levels again this year, and home prices rose at an annualized rate of 8.8% in the second quarter, he said. That helps to mitigate the risk of foreclosure.
On the other hand, some risks to the housing market remain, he said. Rising fuel costs could strain some households in the coming months. And a rising share of adjustable-rate mortgages in the market could come under pressure as interest rates rise.
In addition, heavy refinancing volume in 2002 and 2003 means that most outstanding mortgages are relatively young, and have not reached their peak period of delinquency seasoning, which generally occurs after three to five years of seasoning.
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