FHA loans could face "tidal wave of defaults"

FHA loans could face "tidal wave of defaults"

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MBA: Here’s why delinquency and foreclosure rates continue to drop

Delinquencies drop to lowest level since late 2007

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The delinquency rate for mortgage loans on one-to-four-unit residential properties decreased to a seasonally adjusted rate of 6.04% of all loans outstanding at the end of the second quarter of 2014.

The delinquency rate decreased for the fifth consecutive quarter and reached the lowest level since the fourth quarter of 2007. The delinquency rate decreased seven basis points from the previous quarter, and 92 basis points from one year ago, according to the Mortgage Bankers Association’s delinquency survey. 

“Delinquency and foreclosure rates fell to their lowest levels in more than six years, and the rate of new foreclosure starts is at its lowest level since 2006,” said Mike Fratantoni, MBA’s chief economist. “Strong job growth and continued increases in home prices in most markets have been the main contributors to these steady improvements in mortgage performance.

“We have returned to more typical seasonal patterns with respect to mortgage delinquency, with 30-day and 60-day delinquency rates increasing from the first to the second quarter on an unadjusted basis. Adjusting for the seasonal pattern, we estimate that delinquencies were down for the quarter, and are down almost a full percentage point from last year.” 

The delinquency rate includes loans that are at least one payment past due but does not include loans in the process of foreclosure. 

The percentage of loans in the foreclosure process at the end of the second quarter was 2.49%, down 16 basis points from the first quarter and 84 basis points lower than one year ago. 

This was the lowest foreclosure inventory rate seen since the first quarter of 2008.

“Nationally, the seriously delinquent rate fell by 24 basis points last quarter and has dropped 108 basis points over the past year. The loans that are seriously delinquent, either 90+ days late or in the foreclosure process, were primarily made prior to the downturn, with 75% of them originated in 2007 or earlier. Loans made in recent years continue to perform extremely well due to the improving market and tight credit conditions.

“A new trend that has emerged is growth in the number of prime ARM loans serviced. Many of these are recently originated jumbo loans that are kept on banks’ balance sheets,” Fratantoni said. “However a majority of outstanding prime ARM loans were originated in 2007 and earlier and these loan vintages accounted for over 90% of seriously delinquent prime ARM loans. These older cohorts are keeping the seriously delinquent numbers elevated despite the inflow of newer loans with stronger credit quality.”   

The percentage of loans on which foreclosure actions were started during the second quarter fell to 0.40% from 0.45%, a decrease of five basis points, and reached the lowest level since the second quarter of 2006.

The serious delinquency rate, the percentage of loans that are 90 days or more past due or in the process of foreclosure, was 4.8%, a decrease of 24 basis points from last quarter, and a decrease of 108 basis points from the second quarter of last year. Similar to the previous quarter, 75% of seriously delinquent loans were originated in 2007 and earlier. Loans with vintages started in 2011 and later only accounted for 6% of all seriously delinquent loans.  

“The declining trend in later stage delinquencies and foreclosure measures is clearly continuing at the national level,” added Joel Kan, MBA’s director of economic forecasting. “Some states hardest hit by the crisis, for example California and Arizona, now have foreclosure inventory rates that are both back to pre-crisis levels and less than half the current national rate. On the other hand, despite declines last quarter, states with slower-moving judicial foreclosure regimes, like New Jersey, Florida and New York, have foreclosure inventory rates two to three times the national average. There were 18 states with a higher foreclosure inventory rate than the national average, and 15 of those were judicial states. Judicial states are also starting to see more foreclosure starts than non-judicial states, whereas there used to be no clear tendency for either foreclosure regime in the past quarters.    

“Policymakers continue to closely watch the performance of FHA loans. Our data shows that the seriously delinquent rate for FHA declined 43 basis points over the quarter and 135 basis points relative to last year, indicating continued improvement. The seriously delinquent rate for FHA loans was the lowest since 2008 but still above the long run average of around 4%. The FHA foreclosure starts rate declined nine basis points to 0.55%  and was at the lowest level since 2000, as well as below the long run average of 0.6%.”

On a seasonally adjusted basis, the overall delinquency rate decreased seven basis points for all loan types to 6.04%. The seasonally adjusted delinquency rate decreased nine basis points to 3.20% for prime fixed loans and increased 20 basis points to 5.28% for prime ARM loans. For subprime loans, the delinquency rate decreased 14 basis points to 18.66% for subprime fixed loans and decreased 142 basis points to 20.20% for subprime ARM loans. The FHA delinquency rate fell by 15 basis points to 9.67% and VA delinquency rate fell by 16 basis points to 5.25%.

The non-seasonally adjusted percentage of loans in foreclosure, also known as the foreclosure inventory rate, decreased from last quarter to 2.49%. The foreclosure inventory rate for prime fixed loans decreased nine basis points to 1.37% and the rate for prime ARM loans decreased 27 basis points from last quarter to 3.26%. For subprime loans, the rate for subprime fixed loans increased 29 basis points to 8.36% and the rate for subprime ARM loans decreased 170 basis points to 13.38%.  The foreclosure inventory rate for FHA loans decreased 19 basis points to 2.81 while the rate for VA loans decreased 12 basis points to 1.56%.

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