Delinquencies, Defaults Continue Upward Run In 3rd Quarter
A new report suggests a clear trend of increasing homeowner distress across key US housing markets. According to the MBA's National Delinquency Survey, released today, 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.
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 all 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.
"As we had expected, in the third quarter delinquency rates increased across the board," said Doug Duncan, MBA's chief economist. " 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. "
"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.
Key points in the report include:
- 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).
- 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.
- 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).
- 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.
- 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.
- 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).
In assessing the third quarter numbers, the MBA pointed out that a widespread increase in borrower defaults spanning across credit classes should not be construed as the result of non-traditional mortgage products or potential predatory lending issues that might stimulate regulatory action, which the MBA said would "impede the ability of the market to respond to changes in underlying economic conditions." In addressing non-traidtional mortgages, the trade organization noted "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."
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