FHA Loans Continue Driving Delinquency Cure Rates

The Lender Processing Service (LPS) February Mortgage Monitor found that loan prepayment rates, historically a good indicator of refinancing activity, have declined as interest rates have gradually trended higher.  Although prepayments dropped by nearly 10 percent in February they are still very high by recent historical standards and a very similar pattern exists for all of the more recent vintage loans.  The prepayment rate for GNMA loans and to a lesser extent portfolio loans appear to have remained somewhat immune to rate fluctuations.  

Approximately a half-million loans that were delinquent in January were current in February, the second consecutive increase in loan cure rates. This is an historical pattern with the most significant "cures" coming in the early delinquency categories.  The Mortgage Bankers Association, in reporting on its National Delinquency Survey, always points to a regular seasonal increase in short-term delinquencies in the fourth quarter as families are hit both with the first heating bills of the season and by holiday expenses, then a downturn in those same figures in the first quarter as household finances get back on track.  The January/February cure rate improvements noted by LPS were driven almost entirely by FHA and GNMA loans.

As LPS Applied Analytics Senior Vice President Herb Blecher explained, these cures were not unusual, but rises seen in loans three-to-five months delinquent and foreclosure-initiated categories were unexpected.  "What stood out in this month's data was where that increase was centered. February's rise in cures was driven almost entirely by FHA loans, representing a 29 percent increase from January, and likely driven by revived modification activity related to the revisions to the FHA's Loss Mitigation Home Retention options released late last year.

"We also looked at loan modification data released in the Office of the Comptroller of the Currency's Mortgage Metrics report (aggregated by LPS) and saw that, after two years of steady decline, modification volume increased substantially in the last half of 2012, with about 280,000 modifications occurring during that time," Blecher continued. "The majority of the increases in both Q3 and Q4 occurred in proprietary modifications as opposed to through the Home Affordable Modification Program. Given the current FHA activity, along with the FHFA's recent announcement of its Streamlined Modification Initiative, we could see continued strength in modification volumes in the future."

Modifications made in 2010 and later continue to perform at rates much better than those done even one year earlier.

The U.S. loan delinquency rate fell by 3.16 percent from January to February to 6.80 percent while the pre-sale inventory rate was down nearly one percent to 3.38 percent.  More recent vintage loans with their tighter underwriting standards continue to perform well with loans written in each year after 2007 performing better than loans written in the preceding year.  This is true even for the highest quality loans but does not hold true for the more recent loans written for FHA which is supporting the market for borrowers with lower credit scores and higher loan to value ratios.  

The states with the highest percentage of non-current loans continue to be Florida, New Jersey, Mississippi, Nevada, and New York.