Delinks Up, But VA Rate Improves

As national delinquencies creep up, the industry is reviewing outperformers such as loans insured by the Department of Veteran Affairs, which the Mortgage Bankers Association is recommending to Congress “to keep strong.”

“VA loans have performed better than any other segment of the market” outperforming their counterparts through the recent housing crisis, said MBA’s James H. Danis II, testifying before the House Veterans Affairs Subcommittee on Economic Opportunity. And the reason why the VA portfolio has been able “to weather today’s turbulent market” is largely due to conservative underwriting standards that require fully documented and fully underwritten loans on owner-occupied properties, he said. MBA data show the serious delinquency rate for VA loans in the first quarter of 2010 was 5.29%, well below the 7% for prime loans.

Up to 10.06% of all mortgagors were behind on payments at March 31, which—according to calculations made by National Mortgage News based on MBA data—means $1 trillion in both first and second liens are overdue.

Compared to the same period a year ago, late payments rose 10%. Meanwhile “seriously delinquent” loans or loans that are 90 days or more late or in foreclosure represented 9.54% of all loans, up 2.3% from the first quarter of 2009.

Among worries that global and domestic “fundamental market factors” may be having a greater influence on delinquency rates than is normally the case, MBA’s chief economist Jay Brinkmann said during a press conference, the first-quarter national delinquency report shows yet another increase in delinquencies for residential mortgage loans along with some hope for improvement.

According to Brinkmann, during the past year delinquencies have been driven “much more” by the recession than by any loan type. Despite this, quite a few traditional loan type performance patterns persist, indicating some level of stabilization.

A loan type performance review shows that at 0.69% and 0.89%, respectively, prime fixed-rate mortgages and VA loans have the lowest delinquency rate averages, compared to 1.46% for FHA loans, 2.29% for prime adjustable-rate loans, 2.64% for subprime fixed and 4.32% for subprime ARMs.

Both year-over-year and quarterly improvements in VA delinquency rates were more prominent in all states. Curiously, Michigan is the new “black sheep” in terms of deteriorating performance, while the leading delinquent states of California, Florida, Nevada and Arizona show signs of improvement. While Michigan had the highest 90-day-plus delinquency rate in the VA group it also had the largest quarterly improvement. The change was by 33 bps year-to-year and 87 bps 1Q10 vs. 4Q09.

In Washington, D.C., the VA delinquency rate changed 26 bps quarterly, but showed a dramatic 168 bps improvement in the 1Q10 vs. 1Q09 delinquency rate that was well above the 152 bps national average and other states within the same category, such as Vermont at 65 bps and North Dakota at 59 bps.

A closer look shows delinquency rates among VA loans remain the lowest among all loan types, including FHA and prime fixed loans, which historically have performed better than all other loan types across the board. The rate of delinquency starts and 90-day-plus delinquent VA loans by state ranged from 1.81% to 0.24% and 4.47% to 0.85% top to bottom.

What stands out among foreclosure starts in general is the increase in the percentage of delinquent prime fixed loans from 28.9% in 1Q09 to 36.7% in 1Q10, “more than likely” due to job loss than loan reset issues. So much so that now the delinquency market is dominated by prime fixed rate loans. Subprime loans on the other hand are consistently following an improvement trend. In 1Q10 the subprime ARM delinquency rate was 14.4%, down from 26.6% in 1Q09, in part due to improvements in the top four problematic states: California, Florida, Arizona and Nevada.

A year ago these states represented 45.3% of all problem loans in the country and this year the percentage dropped to 37.9%, lead by significant quarter-to-quarter and year-over-year improvements in California. The dominance of these “sand states” is expected to slowly fade out in the coming quarters, Brinkmann said, with Michigan and other states turning into bottom performers due to various economic issues in recent years.

On a quarter-to-quarter basis all states saw declines in foreclosure starts in all loan types, even though most (up to 40 states) saw increases in foreclosure starts in prime fixed and prime ARM loans and even FHA loans.

And VA loans were the single-best performing loan type consistently showing very low rates of both foreclosure starts and 90-day and over delinquent rates quarter-to quarter and year-over-year outperforming FHAs and prime fixed loans.

Higher consistency in loan type performance is a good sign within a wider context. Brinkmann said during the press conference that he still sees a “case for gradual improvement” going forward.

Economic problems in Europe are expected to have some impact on the housing market. “We should see improvement” in delinquencies and the foreclosure process especially after the body of loans 90-days-plus delinquent goes through the system.

Currently, the MBA’s chief economist said foreclosed inventory, 90-day and over delinquent loans and the shadow inventory make up for about 4.3 million loans that “need to be worked through.” If not, they will add to the existing REO inventory.

Two main factors “that have likely delayed the process” of moving seriously delinquent loans into a final modification or foreclosure are government programs that mitigate longer stays of over 90-day delinquent homeowners in their homes, including various “legal hoops” and new requirements,

Brinkmann said, combined with servicers’ capacity shortages. So since the economic slowdown, the shock from subprime loan defaults and major mortgage processing issues “are behind us,” problems related to the current more traditional recession.