Delinquency Rates Expected to Keep Improving

Loan performance improved widely in the fourth quarter of 2004, though the Federal Housing Administration continues to suffer from unexpectedly high default rates. The number of FHA loans entering foreclosure hit an all time high late last year.

But for other loan types, both delinquencies and defaults have trended downward, and many economists expect that trend to continue.

Overall, 4.23% of home loans were at least 30 days past due at the end of 2004 and 1.12% were in the foreclosure process. The overall delinquency rate was 26 basis points lower than it had been in the fourth quarter of 2003 while the foreclosure rate was down 17 basis points year-over-year. Both the delinquency and foreclosure rates also were down on a quarter-to-quarter basis.

Moreover, the MBA's chief economist expects the performance of loans outstanding will continue to improve - at least for the next few quarters, before the huge pool of loans originated during the last couple of years starts to season into its peak delinquency years. In the meantime, an improving economy and steady job growth augur well for loan performance.

"Overall, mortgage delinquencies are lower than a year ago and lower than last quarter," Mr. Duncan said in a telephone press conference.

However, FHA loans were entering the foreclosure process at a pace of 1.05% during the fourth quarter. The overall delinquency rate for FHA loans declined just two basis points from one year earlier, ending 2004 at a stubbornly high 12.21%. That's more than two percentage points higher than the delinquency rate on subprime credit-quality loans.

Mr. Duncan said the performance of FHA loans "is a problem that will have to be dealt with" in terms of its program offerings.

"The FHA has seen the effect of developments in private markets erode its market share," Mr. Duncan said.

The advent and wide use of automated underwriting has allowed conventional lenders to better assess borrower risk, taking some borrowers who in the past may have been directed to the FHA.

Strong home price appreciation has also allowed many of the FHA's existing customers to refinance into lower-cost conventional loans. And private mortgage insurance companies have bid away some of the FHA's best prospects with new affordable housing products.

Moreover, because the FHA is a heavily regulated program, the cost of making FHA loans is higher than making conventional loans, which may discourage some lenders from participating in the FHA program.

That leaves the FHA with a "weaker and weaker" portfolio of business, Mr. Duncan said. The MBA currently has a task force studying possible changes to bolster the solvency of the FHA program in the long run.

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