MBA: Prime ARMs Set Tone for Troubled Mortgages in Q2
More than nine percent of U.S. mortgages were delinquent or in foreclosure at the end of the second quarter, as both major categories of borrower default activity hit new records, the Mortgage Bankers Association said on Friday morning. We probably don't need to tell you that's a lot; most HW readers won't be surprised to learn, either, that the rise is largely due to continued woes in both California and Florida. But Jay Brinkmann, the MBA's newly-named chief economist, managed to irk more than a few servicing managers we spoke with by suggesting that the woes in the two most troubled U.S. states throughout the housing mess were masking improvements elsewhere -- and then using two states that have seen foreclosures artificially lowered by recent legislation to make his point. "Massachusetts showed a very large drop in foreclosure starts, perhaps signaling a bottom," Brinkmann said in the group's press statement. He also suggested separately that "increases in foreclosures in California and Florida overwhelmed improvements in states like Texas, Massachusetts and Maryland." There's one big problem with his logic: during Q2, both Massachusetts and Maryland in particular saw highly-publicized changes in notice requirements that significantly extended the borrower default notice period from 30 to 90 days in each state. See earlier HW coverage on Maryland here, and coverage of the issue in Massachusetts. "Of course foreclosure starts have slowed since [the two states] extended demand letters," said one servicing manager, who asked not to be identified by name. "You would think that the MBA chief economist would know that." A senior vice president at a large subprime servicer, who asked not to be named, said that the suggestion of a market bottom in Massachusetts was "just plain ludicrous." "We're already starting to see a sharp increase within the state as the effect of the new notice period wears off," he said. Prime ARMs looking rough As we've reported on in the past, prime ARMs are becoming particularly problematic, due to a preponderance of negatively-amortizing loans in California and Florida. "Subprime ARM loans accounted for 36 percent of all foreclosures started and prime ARMs, which include option ARMs, represented 23 percent," said Brinkmann. "However, the increase in prime ARMs foreclosure starts was greater than the combined increase in fixed-rate and ARM subprime loans." Brinkmann said he expects foreclosure start numbers to be "increasingly dominated by prime ARM loans," as the number of option ARM defaults appears set to soar over the next 12 to 24 months. On Sept. 2, for example, Fitch Ratings warned that defaults on 2004-2007 vintage option ARMs will likely double after recasts from current levels; the agency also noted the average recast will cause payments to jump by 63 percent. "People chose the lowest payment option to get into some of the very expensive housing markets and now that prices are coming way down, they can't sell and they can't afford the higher payments," Brinkmann told Bloomberg News in an interview. And, of course, with nearly 21 percent of all mortgage loans in California and Florida, troubles in either state end up being felt by the entire real estate and mortgage market. California and Florida accounted for 58 percent of all prime ARM foreclosures in the second quarter, and 78 percent of the increase in prime ARM foreclosure starts, the MBA said. The foreclosure start rates on prime ARMs were 2.47 percent for California and 3.20 percent for Florida, versus the national median of 1.06 percent. Yet, for all of emerging trouble in prime ARMs, it's equally true that troubled borrowers are on the rise in nearly every other class of loan tracked by the MBA. Overall, seriously delinquent loans -- those 90 days or more in arrears, including foreclosures -- jumped 47 basis points to 4.5 percent during Q2 from first quarter totals, according to MBA's data. And subprime loans saw the number of serious delinquencies rise 266 basis points in one quarter alone, the largest such quarterly increase for any loan category. The only areas posting quarterly declines in some delinquency buckets lie largely with government endorsed loans, both FHA and VA. Surprisingly, FHA saw total past due loans fall 9 basis points between Q1 and Q2, while VA-insured loans saw past dues fall 40 basis points. For more information, visit http://www.mortgagebankers.org.