Foreclosures and Late-Stage Delinquencies Drop

Foreclosure starts dropped during the second quarter and the inventory of homes in the process of foreclosure fell for the first time since 2006, the ""Mortgage Bankers Association"":http://www.mortgagebankers.org (MBA) reported Thursday. Loans 90 days or more past due, the largest share of delinquent mortgages, also decreased.

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MBA Chief Economist Jay Brinkmann says the declines mean the industry's foreclosure prevention efforts are paying off. ""A significant number of these seriously delinquent loans have been successfully modified and reclassified as performing, current loans,"" he said.

The other end of the past-due spectrum, though, is a different story. After declining since the beginning of 2009, the rate of short-term delinquencies â€" particularly loans that are 30 to 59 days overdue â€" is going up, and Brinkmann says the increase in these earlier buckets may ultimately drive the foreclosure measures in the wrong direction.

Looking at the big picture, MBA reports that as of the end of the second quarter, 13.97 percent of the nation's mortgages were at least one payment past due or in foreclosure. That's a four basis point decline from 14.01 percent in Q1, but 81 basis points higher than the same period last year. Even with the improvements cited in MBA's latest report, the industry is looking at $963 billion in troubled home loans.

The percentage of loans on which foreclosure actions were started during the second quarter was 1.11 percent, down

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12 basis points from last quarter and down 25 basis points from one year ago. Foreclosure start rates decreased for all loan types, with the exception of prime fixed loans, which increased two basis points during the quarter and tied the survey’s record high for the prime fixed category hit in the third quarter of 2009.

The improvement in new foreclosure actions was widespread. Forty-three states saw a decline in their quarter-over-quarter foreclosure start rates. The largest decreases were in California, Florida, and Nevada.

Only 11 states saw increases in the rate of foreclosure starts on a year-over-year basis, with the largest increases coming in Illinois, South Dakota, and New Mexico.

The nation’s total foreclosure inventory stood at 4.57 percent of outstanding mortgages at the end of Q2, a decrease of six basis points from the first quarter. MBA says this represents the largest drop since 2005, but is still 27 basis points above last year.

The percent of loans one payment behind had peaked in the first quarter of 2009 at 3.77 percent and fell to 3.31 percent by the end of 2009. Unfortunately that rate has now risen to 3.51 percent. Brinkmann explained that the causes are likely two-fold.

First, he said, 30-day delinquencies are very closely tied to first-time claims for unemployment insurance. The number of first-time claims fell through most of 2009 but leveled off in 2010 and have started to rise again. This increase in unemployment directly impacts mortgage delinquencies.

“Ultimately the housing story, whether it is delinquencies, homes sales, or housing starts, is an employment story,” Brinkmann said. “Until we see the increase in the number of households that comes with an increase in the number of paychecks, all measures of the health of the housing industry will continue to be weak.”

And the second reason for the rise in 30-day delinquencies, according to Brinkmann, is that some of the loans modified over the last several years have become delinquent again because “those borrowers, by definition, have weak credit.”