Some Delinquency Measures Increase in Latest MBA National Delinquency Survey
|December 13, 2006|
The delinquency rate for mortgage loans on one-to-four-unit residential properties stood at 4.67 percent of all loans outstanding in the third quarter of 2006 on a seasonally adjusted (SA) basis, up 28 basis points from the second quarter, and up 23 basis points from one year ago, according to MBA’s National Delinquency Survey.
The increase was driven by increases in delinquencies for all major loan types, most notably for subprime and FHA loans. Delinquency rates for prime, subprime, and FHA loans increased on a seasonally adjusted basis relative to the second quarter.
The percentage of loans in the foreclosure process was 1.05 percent of all loans outstanding at the end of the third quarter, an increase of six basis points from the second quarter of 2006, while the SA rate of loans entering the foreclosure process was 0.46 percent, three basis points higher than the previous quarter. Compared with the third quarter of 2005, the percentage of loans in the foreclosure process was up eight basis points while the percentage of loans entering the foreclosure process was up five basis points. This quarter’s NDS results cover over 42.6 million loans (32.6 million prime loans, 5.8 million subprime loans and 4.2 million government loans).
“The housing market continued to normalize in the third quarter of 2006. Although labor markets remain strong, the pace of job growth has slowed, as has the home price appreciation rate which has decreased in response to higher interest rates and rising inventories of unsold homes. Some states experienced home price declines in the third quarter, and a few have experienced declines over the past six months,” said Doug Duncan, MBA’s Chief Economist and Senior Vice President of Research and Business Development.
“As we had expected, in the third quarter delinquency rates increased across the board. However, increases in delinquency rates were noticeably larger for subprime loans, particularly for subprime ARMs. This is not surprising given that subprime borrowers are more likely to be susceptible to the cumulative increases in rates we’ve experienced, and the slowing of home price appreciation that has resulted. It is important to remember that delinquency and foreclosure rates have been quite low the last two years. “
Some context for these results are emphasized by four points:
1) First, the market is working. In response to mortgage payment performance that has deteriorated somewhat from the very strong performance of recent years, investors have demanded higher returns in the form of wider credit spreads, particularly for loans originated in the second half of 2006. These price signals from the capital markets directly and immediately impact the rates that mortgage lenders can offer to borrowers, in this case particularly to borrowers with blemished credit. The result of these adjustments in the capital markets will be that risk-adjusted returns will be equalized across segments of the market. Far from being a problem, these clear market signals will help the market to more efficiently regain its equilibrium.
2) Second, this widening of credit spreads in the secondary markets passes back through to new borrowers in the form of higher rates. This means lenders reduce credit to less creditworthy or subprime borrowers first.
3) Third, we have no evidence that the increases we have seen in delinquency and foreclosure rates are the result of non-traditional products such as interest-only or payment-option mortgages. These products have made up a significant portion of originations in recent quarters. However, we do not have and are not aware of information that would indicate significant deterioration in performance related to the non-traditional products.
4) Finally, given the first three points, we would strongly caution policymakers to avoid any regulatory or legislative actions that would impede the ability of the market to respond to changes in underlying economic conditions. An important role of public policy should be to facilitate efficient markets, as these will ultimately benefit consumers.
“We expect the housing market to fully regain its footing in the middle of 2007. In the meantime, we anticipate some further increases in delinquency and foreclosure rates in the quarters ahead,” said Duncan. Change from last quarter (second quarter of 2006)
All adjustable rate (ARM) as well as fixed rate (FRM) loans had higher SA delinquency rates compared to the second quarter of 2006. The SA delinquency rate for prime ARMs increased 36 basis points (from 2.70 percent to 3.06) and the rate for prime FRM loans increased ten basis points (from 2.00 to 2.10 percent). The SA delinquency rate for the subprime FRM loans increased 35 basis points (9.23 percent to 9.56 percent), whereas the rate for subprime ARMs increased 98 basis points (12.24 percent to 13.22 percent).
The SA delinquency rate increased during the third quarter for all loan types. The delinquency rate increased 15 basis points for prime loans (from 2.29 percent to 2.44 percent), increased 86 basis points for subprime loans (from 11.70 percent to 12.56 percent), increased 35 basis points for FHA loans (from 12.45 percent to 12.80 percent), and increased 23 basis points for VA loans (from 6.35 percent to 6.58 percent).
During the third quarter of 2006, the foreclosure inventory rate increased across the range of loans. The foreclosure inventory rate increased three basis points for prime loans (from 0.41 percent to 0.44 percent), 30 basis points for subprime loans (from 3.56 percent to 3.86 percent), eight basis points for FHA loans (from 2.20 percent to 2.28 percent), and two basis points for VA loans (from 1.10 percent to 1.12 percent).
By loan type, the percent of new foreclosures increased one basis point for prime loans (from 0.18 percent to 0.19 percent), three basis points for subprime loans (from 1.79 percent to 1.82 percent), four basis points for FHA loans (from 0.75 percent to 0.79 percent) and decreased three basis points for VA loans (from 0.35 to 0.32 percent).
In the third quarter of 2006, the percent of loans that were seriously delinquent, which is defined as the non-seasonally adjusted (NSA) percentage of loans that are 90 days or more delinquent or in the process of foreclosure, was 2 percent, 11 basis points higher than for the second quarter of 2006. This measure is designed to account for inter-company differences on when a loan enters the foreclosure process.
Change from last year (third quarter of 2005)
Since the third quarter of 2005, the SA delinquency rate increased for prime loans, subprime loans and FHA loans, while decreasing for VA loans. The delinquency rate increased ten basis points for prime loans, 180 basis points for subprime loans, and five basis points for FHA loans, whereas the delinquency rate fell 54 basis points among VA loans.
Compared with the third quarter of 2005, the delinquency rate increased 76 basis points for prime ARM loans and 267 basis points for subprime ARM loans. The delinquency rate decreased one basis point for prime fixed loans, while the delinquency rate for subprime fixed loans increased 80 basis points.
The percentage of loans in the foreclosure process increased for all loan categories except VA since the third quarter of 2005, which increased three basis points for prime loans, 55 basis points for subprime loans, and three basis points for FHA loans. Among VA loans, the percentage of loans in foreclosure decreased seven basis points since the third quarter of 2005.
Over the course of the year, the SA percentage of new foreclosures increased one basis point for prime loans and 43 basis points for subprime loans. The percentage of new foreclosures decreased seven basis points for VA loans and decreased by nine basis points for FHA loans.
State and Regional
Across all loan types, the states with the highest overall delinquency rates were Mississippi (11.05 percent), Louisiana (9.50 percent) and Michigan (6.68 percent). Based on foreclosure inventory rates across all loan types, the top three states were Ohio (3.32 percent), Indiana (2.90 percent) and Michigan (2.20 percent). All state level results are not adjusted for seasonal effects. The states with the largest increase in overall delinquency rate in the past year were Michigan (135 basis points), Rhode Island (128 basis points), and Ohio (96 basis points). The states with the largest increase in foreclosure inventory rate were Michigan (59 basis points), Rhode Island (46 basis points), and Maine (43 basis points). From the third quarter of 2005, 44 out of 51 states saw their delinquency rate increase, while 35 states saw an increase in the foreclosure inventory rate.
At the regional level, the Northeast region had an overall SA delinquency rate of 4.39 percent, the North Central region had a delinquency rate of 5.44 percent, the South had a delinquency rate of 5.37 percent and the West had a delinquency rate of 2.81 percent, compared to the national rate of 4.67. For the foreclosure inventory rate, the Northeast region had a rate of 1.06 percent, the North Central region had a rate of 1.89 percent, the South had a rate of 0.99 percent and the West had a rate of 0.49 percent, compared to the national foreclosure inventory rate of 1.05 percent of all loans.
Source: Mortgage Bankers Association