Significant Declines Seen in Late-Stage Delinquencies and Foreclosures

Industry data released Thursday shows a sharp drop in the percentage of home loans 90 or more days past due or in foreclosure -- signs of a mortgage market that is on the mend, according to officials at the ""Mortgage Bankers Association"":http://www.mortgagebankers.org (MBA).
[IMAGE] MBA reported that the share of mortgages at least 90 days delinquent but not yet in foreclosure dropped from 3.9 percent in the fourth quarter of last year to 3.5 percent in the first quarter of this year. Loans in this bucket have now dropped for five straight quarters and are at their lowest level since the beginning of 2009.

At the same time, loans in foreclosure fell from 4.64 percent to 4.52, according to MBA's first-quarter delinquency survey. Jay Brinkmann, MBA's chief economist says it's ""one of the largest drops we have ever seen.""

The percentage of loans on which foreclosure actions were started during the first quarter fell to a two-year low of 1.08 percent, and had the second largest quarter-over-quarter drop ever recorded by MBA.

Paul Dales, senior U.S. economist for the research firm ""Capital Economics"":http://www.capitaleconomics.com says since the crisis hit a decline in the foreclosure start rate has typically been explained as lenders struggling to cope with the sheer volume of defaults. But with the share of mortgages that were more than 90 days in arrears but not yet in foreclosure also falling in the first quarter, ""the declines in the new foreclosure and foreclosure inventory rates appear to be genuine improvements,"" he said.

Altogether, the serious delinquency rate â€" comprised of loans that are 90 days or more past due and those in the process of foreclosure â€" is down 50 basis points from the previous quarter and down 144 basis points from a year ago, MBA reported.

Brinkmann says of particular importance is that the drop in the serious delinquency rate was driven by improving numbers for loans originated between 2005 and 2007.

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""These are the loans that drove the mortgage market collapse and now represent about 31 percent of loans outstanding but 65 percent of the loans seriously delinquent,"" Brinkmann said.

""Given that loans originated during this period are now past the point where loans normally default, and that loans originated since then generally have better credit quality, mortgage performance should continue to improve,"" according to Brinkmann.

The share of mortgages behind by just one payment during the first quarter edged up to 3.35 percent from 3.26 percent at the end of 2010.

Dales said this development is “worrying” considering the recent increases in employment, but Brinkmann stressed that short-term delinquencies remain at pre-recession levels.

The combined percentage of loans in the U.S. that were foreclosure or at least one payment past due stood at 12.31 percent as of the end of March, according to MBA’s report. Brinkmann says, however, that national statistics are “somewhat meaningless” because local market conditions determine values and peoples' perception of conditions.

Looking at more localized state-specific data, Brinkmann points to Florida as “a problem.” Twenty-four percent of all mortgages in the country that are in foreclosure are in Florida. Brinkmann says the number of loans in foreclosure in the Sunshine State is actually larger than the total number of loans in 22 other states, illustrating the outsized impact such hard-hit states are having on the national numbers.

Five states account for over half of the loans in foreclosure in the country: Florida (24%), California (11%), Illinois (6%), New York (5%), and New Jersey (5%).

In addition, Brinkmann says the increasing divergence in market recovery attributed to differences in states' laws should be noted.

The states with the biggest increases in the number of loans in foreclosure are Florida, New Jersey, and Illinois (all judicial states). Those with the largest decreases in loans in foreclosure were the non-judicial states of California, Arizona, and Michigan.

All of these six states had declines in loans 90 days or more past due and in the rate of new foreclosures started. But Brinkmann says what differentiates the foreclosure inventory trajectories is that the states with a judicial process increases the number of loans that sit in foreclosure for extended periods and adds to the high levels of housing inventory overhang in those states.