Distressed Loans Hit Five Year Lows; Delinquencies Down for all but FHA Loans

Distressed loans fell to the lowest level in five years during the second quarter the Mortgage Bankers Association (MBA) said today. Both delinquencies and loans in foreclosure saw substantial decreases both from the previous quarter and from one year earlier with foreclosure starts during the quarter at less than half of the peak rate of1.42 percent in September 2009.

The delinquency rate for one-to-four family mortgages decreased to a seasonally adjusted rate of 6.96 percent at the end of the second quarter, 29 basis points (bps) below the rate at the end of Quarter One and the lowest rate since mid-2008. The rate at the end of the second quarter of 2012 was 7.58 percent.

MBA's National Delinquency Study bases its delinquency rate on loans that are at least one payment past due but not in foreclosure. Loans for which foreclosure proceedings were started during the quarter represented .64 percent of mortgaged properties and those starts were down from .70 percent in the first quarter. Loans actively in the foreclosure process represented 3.33 percent of all loans compared to 3.55 percent in the first quarter and 4.27 percent during the same period in 2012.

The rate of serious delinquencies, those that are 90 or more days past due or in foreclosure was 5.88 percent, down 51 bps from the previous quarter and 143 bps year-over-year. MBA said that both first and second quarter results may overstate the improvement in longer term delinquencies because a number of distressed loans have been transferred to a large specialty servicer which does not participate in the MBA survey.

Past due and loans in foreclosure now represent 10.13 percent of all mortgage loans, 17 bps less than in the first quarter and 149 bps below the rate in Q2 2012 and the lowest rate since 2008.

Jay Brinkmann, MBA's Chief Economist and Senior Vice President of Research and Economics said, "For most of the country, delinquencies and foreclosures have returned to more normal historical levels. Most states are at or only slightly above longer-term averages, and some of the worst-hit states are showing improvement. For example while 10 percent of the mortgages in Florida are somewhere in the process of foreclosure, this is down considerably from the high of 14.5 percent two years ago. While Florida leads the country in the rate of foreclosures started, that rate of 1.1 percent is the lowest since mid-2007 and half of what it was three years ago."

Brinkmann said some of the highest numbers are in New York, which hit an all time high in the second quarter and is now essentially equal with Florida, and New Jersey and Connecticut. The percentage of loans in foreclosure in New Jersey remains about the same as the rates in California, Arizona and Nevada combined. The foreclosure percentages in Connecticut are back to near all-time highs for that state.

"In contrast," he said, "foreclosure starts fell or were unchanged in 43 states and the foreclosure inventory rate either improved or was unchanged in 45 states.

"States with a judicial foreclosure system continue to bear a disproportionate share of the foreclosure backlog. While the percentage of loans in foreclosure dropped in both states with judicial systems and states with nonjudicial systems, the average rate for judicial states was 5.59 percent, triple the average rate of 1.86 percent for nonjudicial states. Both declined to recent lows, with judicial states seeing the lowest foreclosure inventory since 2009 and nonjudicial states seeing the lowest foreclosure inventory since 2007." Brinkmann said.

Overall delinquency rates decreased from the first quarter on a seasonally adjusted basis for all loan types except FHA loans. Prime fixed-rate mortgages (FRM) decreased 23 bps to 3.54 percent and adjustable rate mortgages (ARM) by 87 bps to 6.75 percent. In the subprime category FRM were down 131 bps to 18.81 percent and 271 bps to 21.01 percent for ARM. The VA rate was 6.14 percent, a decrease of 20 bps but the FHA rate rose six bps to 11.03 percent. The FHA increase was led by a 26 bps increase in the 30-day delinquency rate.

The foreclosure inventory rate for prime FRM was down 27 basis points and down 56 bps for ARM. The inventory for subprime FRM increased 39 bps but the ARM inventory decreased by one bps. FHA loans were down 28 bps points and VA loans 10 bps.

Given the challenges in interpreting the true seasonal effects in these data when comparing quarter to quarter changes, MBA said it is important to highlight the year over year changes of the non-seasonally adjusted results. Compared with one year earlier, the foreclosure inventory rate decreased 71 bps for prime fixed loans, 292 bps for prime ARM loans, 102 for subprime fixed, and 486 for subprime ARM loans, 55 bps for FHA loans and 40 for VA loans.

Over the past year, the non-seasonally adjusted foreclosure starts rate decreased 21 bps for prime fixed loans, 72 bps for prime ARM loans, 34 for subprime fixed, 30 for subprime ARM loans, 72 for FHA loans and one bp for VA loans.