Mortgage Delinquencies Down from Third Quarter, but Still Up from 2008

There's good news and bad news in the most recent U.S. mortgage delinquency data: The good news is that the seasonally adjusted delinquency rate for one- to four-unit residential properties fell to 9.47% of all loans at the end of the fourth quarter, compared to 9.64% at the end of the third quarter, the Mortgage Bankers Association announced Friday. The bad news is that at 9.47%, the rate is still 159 basis points higher than it was a year ago. In other words, there are about 16.5% more delinquencies now than at the end of 2008.

Further, the percentage of loans in the foreclosure process at the end of fourth-quarter 2009 was 4.58%, up 11 basis points from third-quarter 2009 and up 128 basis points from one year ago, the association said. The combined percentage of loans in foreclosure or at least one payment past due was 15.02% on a non-seasonally adjusted basis, the highest ever recorded in the delinquency survey, the association added.

Light at the End of the Tunnel?

Jay Brinkmann, chief economist for the association, says he thinks he sees a light at the end of the tunnel regarding mortgages delinquencies.

"We are likely seeing the beginning of the end of the unprecedented wave of mortgage delinquencies and foreclosures that started with the subprime defaults in early 2007, continued with the meltdown of the California and Florida housing markets due to overbuilding and the weak loan underwriting that supported that overbuilding, and culminated with a recession that saw 8.5 million people lose their jobs," Brinkmann said. "The pattern of mortgage delinquencies now very much follows the pattern of unemployment. Just as short-term delinquencies have fallen during the latter part of 2009, first-time claims for unemployment insurance have declined by about a third since their peak in March 2009."

What does the fourth-quarter delinquency data mean for investors and homeowners? For investors, it's a mixed bag: The delinquency rate did dip, but it was only one quarter's data. It will take a continued series of quarterly declines in delinquency rates before one can form a meaningful conclusion that on-time mortgages are going in the right direction.

The Pattern of Recovery Will Vary by Region

For those in the housing market, the data suggests that the massive flood of homes coming on the market is abating, which will help support prices. However, activity in the U.S. housing sector is highly regional. All other factors being equal, the West, led by California, is likely to recover first because it entered the housing bust first and experienced the largest price declines. A similar pattern should hold true for the East, which had the second-largest price declines.

Conversely, recovery in the Midwest, where the economy is stalled by the auto sector's slump, is likely to lag behind that of other regions. Finally, the South, which did not go through as large a housing boom and hence had a shallower bust, may experience only a modest, slow recovery in homes sales and prices.
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