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Unemployment Drives Record Delinquencies, MBA Survey Says

Sorohan, Mike; Kemp, Carolyn
Rising unemployment continues to drive record mortgage delinquency and foreclosure rates in the third quarter, the Mortgage Bankers Association reported yesterday.

MBA’s 3rd Quarter National Delinquency Survey reported the seasonally adjusted delinquency rate for mortgage loans on one-to-four-unit residential properties rose to 9.64 percent of all loans outstanding as of the end of the third quarter, up 40 basis points from the second quarter of 2009 and up 265 basis points from one year ago.

“Despite the recession ending in mid-summer, the decline in mortgage performance continues,” said MBA Chief Economist Jay Brinkmann. “Job losses continue to increase and drive up delinquencies and foreclosures because mortgages are paid with paychecks, not percentage point increases in gross domestic product.”

The non-seasonally adjusted delinquency rate increased 108 basis points from 8.86 percent in the second quarter to 9.94 percent this quarter. The delinquency rate breaks the record set last quarter; records are based on MBA data dating back to 1972.

The delinquency rate includes loans that are at least one payment past due but does not include loans somewhere in the process of foreclosure. The percentage of loans in the foreclosure process at the end of the third quarter was 4.47 percent, an increase of 17 basis points from the second quarter of 2009 and 150 basis points from one year ago. The combined percentage of loans in foreclosure or at least one payment past due was 14.41 percent on a non-seasonally adjusted basis, the highest ever recorded in the MBA delinquency survey.

The percentage of loans on which foreclosure actions were started during the third quarter was 1.42 percent, up six basis points from last quarter and up 35 basis points from one year ago. The percentages of loans 90 days or more past due, loans in foreclosure, and foreclosures started all set record highs. The percentage of loans 30 days past due is still below the record set in the second quarter of 1985.

Over the past year, Brinkmann said, unemployment increased by nearly 5.5 million; as a result, the 3rd quarter NDS saw the number of seriously delinquent loans by nearly two million loans and increasing the rate of new foreclosures from 1.07 percent to 1.42 percent.

“Prime fixed-rate loans continue to represent the largest share of foreclosures started and the biggest driver of the increase in foreclosures,” Brinkmann said. “This is an extremely trying period for the jobs market, and it’s having an effect on the industry.”

The report said 33 percent of foreclosures started in the third quarter were on prime fixed-rate and loans; those loans represented 44 percent of the quarterly increase in foreclosures. Brinkmann said foreclosure numbers for prime fixed-rate loans will get worse, because those loans represented 54 percent of the quarterly increase in loans 90 days or more past due but not yet in foreclosure.

“The performance of prime adjustable-rate loans, which include pay-option ARMs in the MBA survey, continue to deteriorate with the foreclosure rate on those loans for the first time exceeding the rate for subprime fixed-rate loans,” Brinkmann said. “In contrast, both subprime fixed-rate and subprime adjustable rate loans saw decreases in foreclosures.”

The survey also reported the foreclosure rate on FHA loans also increased, despite having a large increase in the number of FHA-insured loans outstanding, by 1.1 million over the last year.

“This increase in the denominator depresses the delinquency and foreclosure percentages,” Brinkmann said. “If we assume these newly originated loans are not the ones defaulting and remove the big denominator increase from the calculation results, the foreclosure rate would be 1.76 percent rather than 1.31 percent reported.”

The survey said Florida, California, Arizona and Nevada continue to show a disproportionate share of mortgage problems, representing 43 percent of all foreclosures started in the third quarter, down only slightly from 44 percent both the second quarter of this year and the third quarter last year. Those states had 37 percent of the nation’s prime fixed-rate loan foreclosure starts and 67 percent of the prime ARM foreclosure starts. As of the end of September, 25 percent of the mortgages in Florida were at least one payment past due or in foreclosure.

“At the current clearance rate, it’s going to take Florida until the end of next year just to clear out current foreclosures,” Brinkmann said.

Looking ahead, Brinkmann said delinquency rates and foreclosure rates will continue to worsen before they improve, with employment being a lagging indicator.

“First, it is unlikely the employment picture will get better until sometime next year and even then jobs will increase at a very slow pace,” Brinkmann said “Perhaps more importantly, there is no reason to expect that when the economy begins to add more jobs, those jobs will be in areas with the biggest excess housing inventory and the highest delinquency rates. Second, the number of loans 90 days or more past due or in foreclosure is now a little more than 4 million as compared with 3.9 million new and previously occupied homes currently for sale, although there is likely some overlap between the two numbers. The ultimate resolution of these seriously delinquent loans will put added pressure on the hardest hit sections of the country.”

Change from Past Quarter (2nd Quarter 2009)
The seasonally adjusted delinquency rate increased 43 basis points for prime loans (from 6.41 percent to 6.84 percent), 107 basis points for subprime loans (from 25.35 percent to 26.42 percent), and two basis points for VA loans (from 8.06 percent to 8.08 percent). The delinquency rate for FHA loans decreased six basis points (from 14.42 percent to 14.36 percent). The non-seasonally adjusted delinquency rate for FHA loans however, increased 134 basis points this quarter (from 13.70 percent to 15.04 percent).

The non-seasonally adjusted percentage of loans in the foreclosure process increased 20 basis points for prime loans (from 3.00 percent to 3.20 percent), and increased 30 basis points for subprime loans (from15.05 percent to 15.35 percent). FHA loans saw a 34 basis point increase in foreclosure inventory rate (from 2.98 percent to 3.32 percent), while the foreclosure inventory rate for VA loans increased 22 basis points (from 2.07 percent to 2.29 percent).

The non-seasonally adjusted foreclosure starts rate increased 13 basis points for prime loans (from 1.01 percent to 1.14 percent), increased 16 basis points for FHA loans (from 1.15 percent to 1.31 percent), and increased 19 basis points for VA loans (from 0.68 percent to 0.87 percent). This rate decreased 37 basis points for subprime loans (from 4.13 percent to 3.76 percent).

The seriously delinquent rate, the non-seasonally adjusted percentage of loans that are 90 days or more delinquent, or in the process of foreclosure, was up from both last quarter and from last year. This measure is designed to account for inter-company differences on when a loan enters the foreclosure process.

Compared to the second quarter, the rate increased 82 basis points for prime loans (from 5.44 percent to 6.26 percent), 216 basis points for subprime loans (from 26.52 percent to 28.68 percent), 89 basis points for FHA loans (from 7.78 percent to 8.67 percent) and 37 basis points for VA loans (from 4.69 percent to 5.06 percent).

Change from Past Year (3rd Quarter 2008)
The seasonally adjusted delinquency rate increased 250 basis points for prime loans, 639 basis points for subprime loans, 144 basis points for FHA loans and 80 basis points for VA loans.

The foreclosure inventory rate increased 162 basis points for prime loans, 280 basis points for subprime loans, 100 basis points for FHA loans and 83 basis points for VA loans. The foreclosure starts rate increased 35 basis points overall, 53 basis points for prime loans, 36 basis points for FHA loans and 28 basis points for VA loans. The starts rate decreased 47 basis points for subprime loans.

The seriously delinquent rate increased 339 basis points for prime loans, 912 basis points for subprime loans, 262 basis points for FHA loans and 161 basis points for VA loans.

Data are from a proprietary paid subscription service of MBA. The NDS, which has been conducted since 1953, covers 44.5 million loans on one- to four- unit residential properties, representing approximately 85 percent of all “first-lien” residential mortgage loans outstanding in the United States. This quarter's loan count saw a decrease of about 75,000 loans from the second quarter and decreased by 800,000 loans from one year ago. The decrease in loans is likely due to changing market conditions, as the number of participants in the survey is essentially unchanged. Loans surveyed were reported by approximately 120 lenders, including mortgage bankers, commercial banks and thrifts.