Trends Suggest Delinquency Rate May Head Lower

It may be a modest trend, but the delinquency rate on home loans appears to be improving, and some industry economists are optimistic that the trend will continue.

In the third quarter, the percentage of home loans more than 30 days past due fell to 4.41%, edging down from 4.43% in the second quarter. The third-quarter figure was 24 basis points lower than it had been a year earlier.

The foreclosure situation was similar, with the inventory of loans in foreclosure dipping to 1.14%, down just two basis points from the previous quarter but now at its lowest point in four years. The rate of loans entering the foreclosure process, at 0.39%, was down five basis points from a year earlier.

Doug Duncan, chief economist of the MBA, said in a conference call with reporters that the improvement in delinquency and foreclosure rates had been expected, and he thinks the trend will continue, citing the benefits of economic growth and "steady, modest" job creation.

"These improvements override the effects of the increased subprime and ARM shares and the aging of the young mortgage portfolio. We expect this trend of modestly declining delinquencies and foreclosures to continue," he said.

But with the origination of adjustable-rate loans and products like interest-only loans rising, Mr. Duncan said the MBA is keeping a watch on how these loans perform. Mr. Duncan noted that ARM originations have been running at historically high levels in the MBA's weekly loan application survey.

Currently, 17% of the prime credit quality loans in the MBA's delinquency survey are ARMs, while 54.7% of subprime loans are ARMs. "To the extent there is a risk component associated with ARMs, it would show up in the supbrime cohort more so than in the prime," he said.

Speaking of subprime, companies that service lower-credit-quality portfolios continue to report improvement in the performance of these loans. The delinquency survey found that the delinquency rate for subprime loans declined by 135 basis points over the 12-month period ending Sept. 30. At the end of this year's third quarter, 10.39% of subprime loans were at least 30 days past due, down from 12.35% a year earlier.

The foreclosure rate also is improving for subprime loans. In the third quarter of this year, the foreclosure inventory percentage for subprime loans stood at 4.07%, down from a foreclosure inventory rate of 5.74% one year earlier.

Mr. Duncan said that he expects the subprime delinquency rate to be somewhat volatile on a quarter-to-quarter basis.

Subprime loans now account for four million of the delinquency survey's 38 million loans. In a recent interview with editors of MSN and its sister publications, Mr. Duncan said the subprime loans will likely rise as a percentage of new loan originations going forward.

"The share will rise, because conventional refinancing will fall as a share of the total," he said. Not all economists are sanguine about the prospects for home prices. John Calverley, the London-based chief economist at American Express Bank, said in a recent article that the United States seems to be in the early-to-middle stages of a housing bubble.

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