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Outlook for Credit Quality Is Bleak

There's little hope to stem the tide of rising mortgage delinquencies and defaults in the short term, according to economists who follow the industry.

Jay Brinkmann, chief economist for the MBA, said that declining home values, which limit the ability of troubled borrowers to sell a home, have increased the "roll rate" of loans that are 30 days delinquent in one quarter that go into foreclosure during the next quarter.

In the 1990s, about 10% of 30-day past due loans moved into foreclosure. Today, about 30% of short-term delinquencies roll into foreclosure, he said during a conference call to discuss the MBA's delinquency survey. Moreover, in hard-hit states, the roll rate is even higher, 75% today in California, for instance. And with unemployment rising fast, there's little hope for relief in the short term, according to Ryan Sweet, an economist at Moody's Economy.com. He told Mortgage Servicing News that he expects the unemployment rate to rise to 8.5% by early 2010. "Mortgage credit quality is going to decline well into 2009," Mr. Sweet said.

Mr. Brinkmann concurs that fundamental economic factors are now adding to default pressure, which was already heightened by loose underwriting practices during the mortgage boom years, both nationally and in already hard-hit states.

"Clearly the job losses in California and Florida are adding to the problems that already existed with the housing fundamentals in those two states," Mr. Brinkmann said. Nationally, he predicts that job losses will lead to higher foreclosures on prime credit quality loans.

The raw numbers in the MBA's quarterly delinquency survey - showing a sharp rise in delinquencies - demonstrate just how dire the situation is today. The MBA projects that foreclosure starts will total 2.2 million this year.

The MBA said that 6.99% of all home loans outstanding were at least 30 days past due at the end of the third quarter, up 58 basis points from the second quarter and 140 basis points from one year earlier, and 2.97% of home loans were in some stage of foreclosure, up 22 basis points from the second quarter and 128 basis points from one year earlier.

"The total delinquency rate continues to be the highest recorded in the history of the MBA survey," Mr. Brinkmann said.

In one possible bright spot, the ratio of new loans entering foreclosure stood at 0.29%, flat from the second quarter and only 29 basis points higher than one year earlier. But he cautioned that the foreclosure start data are being affected by moratoria on foreclosures by companies that are holding loans in the 90-day-plus delinquency category during the modification and workout process.

The survey found a 45% increase in 90-day-plus delinquencies, the biggest jump ever seen in the survey's history.

That increase is consistent with Hope Now data that show an increasing volume of mortgage servicer workouts in recent months.

Mr. Brinkmann said that prime and subprime ARM loans in California and Florida continue to drive the sharp increases in foreclosures.

The delinquency rate rose for all products except for subprime ARMs, where there was a decline in the 30-day overdue rate. While that is encouraging, the subprime ARM overdue rate, at almost 19%, remains alarmingly high.