National Delinquency Study Is Just A Bit Disquieting

The results are too subtle (and also presented in an incredibly confusing format) to determine if rate shock is starting to take its toll on American homeowners, but, looking beyond the cheerful lead paragraph, "The delinquency rates for mortgage loans ...were down 2 basis points from the first quarter..." The National Delinquency Study (NDS) released by The Mortgage Bankers Association this week is a little disquieting. The report covered mortgage delinquencies and foreclosures during the second quarter of 2006 for a universe of over 42.5 million one to four family loans; 32.4 million are classified as prime loans, 5.7 million as subprime, and 4.4 million are government loans (VA, FHA, etc.)

In addition to the above loan classifications, the report deals in the aggregate and separately with fixed rate and adjustable rate mortgages and also classifies delinquencies along several criteria including over 90 days delinquent, entering foreclosure, and in foreclosure. The current report does not break out other subsets but if memory serves there is at least one category that includes mortgages that are more than 30 but less than 90 days delinquent. There are also statistics comparing the last quarter with the first of 2006 and with the 2nd Quarter of 2005.

While delinquencies overall are down two basis points since the first quarter to a current level of 4.39 percent of all mortgage loans, the rate is up 5 basis points from the second quarter of 2005.

The NDS reported that delinquency rates for prime, subprime, and FHA loans were up on a seasonally adjusted basis from the first quarter and that the decline in the overall delinquency rate was driven by the past due "90 days or more" category within the overall delinquency rate. The decline in this category was especially notable in Louisiana and Mississippi. That this is Katrina related is obvious but whether it is because homeowners are beginning to collect on their insurance and bringing loans current, because the majority of mortgages have traveled along the continuum to the final stages of foreclosure, or because of some form of forbearance was not explored.

Adjustable rate mortgages may be beginning to indicate symptoms of rate shock. All types of ARMs had higher delinquency rates than in the first quarter of this year while fixed rate mortgage loans were either unchanged or showed a lower rate of delinquency. The seasonally adjusted delinquency rate for prime ARMs increased 40 basis points to 2.70 percent and subprime ARMs increased 22 basis points to 12.24 percent. Fixed rate prime loans were unchanged with a 2 percent rate and subprime fixed rate loans decreased from 9.61 percent to 9.23 percent.

As we have stated before, the sheer percentage of subprime loans that are in trouble are ample evidence of the risks attendant on lending to less credit-worthy populations and validate the higher rates charged for this type of loan.

Overall the seasonally adjusted delinquency rate increased for all loan types except VA loans which decreased 58 basis points from quarter one to 6.35 percent. Prime rate mortgages moved from 1.15 percent to 2.29 percent and subprime loans increased from 11.50 percent to 11.70 percent of all loans. FHA loans ratcheted up from 12.12 percent to 12.45 percent.

Homes that are actually in foreclosure accounted for 0.99 percent of all homes at the end of the second quarter, an increase of 1 basis point compared to the first quarter; 0.43 percent of homes entered the foreclosure process during the quarter, up 2 basis points when seasonally adjusted. In-foreclosure loans were down 1 percent but those entering foreclosure were up 4 basis points. Prime loans in foreclosure accounted for 0.41 percent of all such loans, up one basis point since last quarter, and 3.56 percent of subprime mortgages, a 6 basis point increase. VA loans again partially offset overall stats by decreasing 4 basis points to 1.10 percent of those loan types.

Loans entering foreclosure increased 1 basis point since last quarter (to 0.18 percent) but those in the subprime subset were up 17 basis points to 1.79 percent. As stated earlier, the seriously delinquent, i.e. loans over 90 days in arrears, declined but this category is largely designed as a catchall for differences company to company and state to state about when loans enter foreclosure.

It is the year to year statistics that are most disquieting in the MBA report.

Compared to Quarter Two of 2005, the delinquency rate was up 51 basis points overall but 220 basis points (2.20 percent) for subprime ARM loans. Delinquent fixed rate loans declined 2 basis points but ARMS increased 17 basis points. Loans in the foreclosure process generally decreased since Quarter Two of 2005 - .001 for prime loans; .009 for FHA loans, and .015 for VA loans; but among subprime loans the percentage of loans in foreclosure increased 27 basis points over last year.

These figures still reflect the impact of Hurricane Katrina which struck a little over one year ago and impact on year-over-year statistics. For example, MBA says that, if the effects of the hurricane are factored out of the national statistics, the total delinquency rate drops 5 basis points. In the first quarter this adjustment resulted in a 10 basis point reduction. The report states that "as we progress further in time from the hurricane, its effects on the delinquency rate are slowly diminishing."

MBA's chief economist Doug Duncan stated "In previous quarters we indicated a number of factors including the aging of the loan portfolio, increasing short-term interest rates, and high energy prices (that) have been putting upward pressure on delinquency rates. To this point, generally healthy economic growth and labor markets have kept delinquency rates from rising. However, we are seeing increases in delinquency rates for subprime loans, particularly for subprime ARMs. It is not surprising that subprime borrowers are more susceptible to these changes."

"Going forward we expect some further slowing in the economy and the housing market. As a result, we will see modest increases in delinquency and foreclosure rates in the quarters ahead."

The NDS is a report we have covered only occasionally over the last two years. However, in the present climate we will be reporting on it each time it is issued. The next report is due in December.