Mortgage Delinquencies Decline, but What Does It Mean?

Stricter lending rules have helped curb the number of mortgage delinquencies. Agencies from the FHA to Fannie Mae and Freddie Mac are reporting a decreasing number of people who are behind on mortgage payments.

But while it seems that mortgage delinquencies have peaked, the number of people still behind on mortgage payments remains high. Anyone looking for good news in the numbers will have to look past the 4.9 million borrowers who haven't made a mortgage payment in at least three months. That number is up from 3.7 million people one year earlier. The Mortgage Bankers Association reports that one in seven homeowners is either paying late or in foreclosure.

The good news on loan default rates from other agencies reinforces the feeling that the worst is over. The Wall Street Journalreported that government-owned Fannie Mae and Freddie Mac loans that were 90 days or more past due fell in March for the first time in three years. Nationally, the number of loans 90 days past due fell slightly last month. The number stands at 9.54 percent, from 9.67 at the end of 2009.

The question, however, is whether the factors that brought about this good news will be sustainable in the coming months. If not, hard-to-get mortgages will be even harder to obtain.
FHA-backed mortgages have been a lifeline for many who don't have 20 percent for a down payment -- the usual amount required for a conventional mortgage on a home. The government agency doesn't lend money directly to borrowers; its role is to insure lenders against losses. FHA-backed mortgages require a down payment of just 3.5 percent, giving many more people entrée into the American Dream of homeownership.

With the rise in mortgage delinquencies, the agency was facing the prospect of running out of money. A taxpayer bailout, or even tighter lending standards, could result.

The FHA had already raised the credit rating for borrowers; typically those who want to obtain an FHA mortgage must have a credit score of at least 620; a few years ago, it was as low as 500.

April was the third month in a row that FHA-backed mortgage delinquencies declined. Loans that were 90 days past due for April were about 8.5 percent; that number had peaked at January, at 9.4 percent.

Low mortgage rates, loan modifications and an improving economy have helped stabilize the delinquency rate, as more people have been able to catch up and continue mortgage payments. In addition, many received a boost this spring with income tax refunds.

But the biggest factor behind the decline may be those stricter lending standards. While the number of delinquent loans originating in 2007 and 2008 are at 9.3 percent and 8.9 percent, respectively, loans that originated in 2009 are at a much lower 5.3 percent. Overall, nearly 22 percent of loans made in 2008 and 2007 have missed two or more payments, compared to 7.5 percent of loans that originated in 2009.

While those tighter lending restrictions have gone a long way toward helping the FHA stem the tide of delinquent mortgages, the agency's commissioner, David Stevens, told the Wall Street Journal, "there's still plenty of room for caution."

A still-high number of foreclosures, a stubborn unemployment rate, and a shaky stock market could derail progress. If the FHA needs a taxpayer bailout, it could be one more roadblock in the path of recovery for the housing market.
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