Negative Equity Continues Sharing High Correlation With Delinquencies

Delinquencies declined 1.6 percent from June to July resulting in a mortgage loan delinquency rate of 7.03 percent and pre-sale foreclosure inventory was down 0.2 percent to 4.08 percent according to the Mortgage Monitor report from Lender Processing Services.  At the same time, foreclosure starts rose 7.1 percent to 185,811 from 173,556 in June but starts were down 10.5 percent from the 207,539 foreclosure starts in July 2011.  Starts are outnumbering sales and 90+ day liquidations by a factor of 2:1.  While starts were up, first time foreclosure starts are near a four year low, nearly 40 percent of the foreclosure starts in July were repeats, that is homeowners who were in foreclosure before, cured, and have entered foreclosure again. 

The most interesting information from the report was a finding that negative equity is continuing to be a leading indicator of delinquencies.  Nationally about 18 percent of homes are underwater and as negative equity increases so do the number of problem loans. 

"The July mortgage performance data shows a continuing correlation between negative equity and new problem loans," explained Herb Blecher, senior vice president, LPS Applied Analytics.   "In Nevada and Florida, two of the states with the highest percentage of underwater borrowers, more than three percent of borrowers who were up to date on their payments are 60 or more days delinquent six months later. This suggests that further home price declines - should they occur - could jeopardize recent improvements."

Judicial and non-judicial states continue to proceed along separate paths with several metrics actually deteriorating in judicial states.   Since the peak in delinquencies, non current rates have declined by 31 percent in non-judicial states but only 13 percent in judicial states.  Foreclosure starts increased 12 percent in judicial states from June to July while decreasing 3 percent in non-judicial states, and the foreclosure inventory in Judicial states (6.46 percent) is almost three fold as large as that of non-judicial states (2.38 percent).

Mortgage originations for June (the data for this metric lags the others) were at the highest level since late 2010 with around 700,000 new loans.  Loans for refinancing also increased in July but the increase among borrowers with low credit scores was notable.