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MBA: Mortgage delinquencies and foreclosures drop in 1Q

Is the housing market normalizing?

The delinquency rate for mortgage loans on one-to-four-unit residential properties decreased to a seasonally adjusted rate of 5.54% of all loans outstanding at the end of the first quarter of 2015.  

This was the lowest level since the second quarter of 2007. The delinquency rate decreased 14 basis points from the previous quarter, and 57 basis points from one year ago, according to the Mortgage Bankers Association’s National Delinquency Survey.

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 first quarter was 2.22%, down five basis points from the fourth quarter of 2014 and 43 basis points lower than the same quarter one year ago.  This was the lowest foreclosure inventory rate since the fourth quarter of 2007.

“The latest decline in the share of households suffering mortgage payment problems provides more evidence that the housing market is slowly normalizing,” said Ed Stansfield, chief property economist for Capital Economics. “To the extent that it encourages lenders to ease credit conditions and make more loans, it’s also positive news for mortgage market activity.”

The percentage of loans on which foreclosure actions were started during the first quarter was 0.45%, a decrease of one basis point from the previous quarter, and was unchanged compared to the first quarter of 2014. 

The serious delinquency rate, the percentage of loans that are 90 days or more past due or in the process of foreclosure, was 4.24%, a decrease of 28 basis points from the previous quarter, and a decrease of 80 basis points from the first quarter of 2014. 

“Delinquency rates and the percentage of loans in foreclosure continued to fall in the first quarter and are now at their lowest levels since 2007,” said Joel Kan, MBA’s Associate Vice President of Industry Surveys and Forecasting.  “The job market continues to grow, and this is the most important fundamental improving mortgage performance. Additionally, home prices continued to rise, as did the pace of sales, thus increasing equity levels and enabling struggling borrowers to sell if needed.”

“The foreclosure inventory rate has decreased in the last twelve quarters, and now is at the lowest level since the fourth quarter of 2007. The rate, at 2.22%, was about half of where it was at its peak in 2010. With a declining 90+ day delinquency rate and the improving credit quality of new loans, we expect that the foreclosure inventory rate will continue to decline in coming quarters. Foreclosure starts decreased one basis point from the previous quarter, and continue to fluctuate from quarter to quarter mainly due to state-level differences in the speed of the foreclosure process. At 0.45%, the level of foreclosure starts is at its long run average.  

Federal Housing Administration-backed loans had a decrease in overall delinquencies, including a non-adjusted 47 basis point decrease in the 90 day or more delinquent category. However, there was a 12 basis point increase in the percentage of loans in foreclosure and a nine basis point increase in foreclosure starts in the first quarter as distressed loans entered the foreclosure process. A large portion of the weakness in FHA performance came from the 2008, 2009, and 2010 vintages.

Around 40% of loans serviced are in judicial states and these states continue to have a foreclosure inventory rate that is well above that of non-judicial states. For states where the judicial process is more frequently used, 3.64% of loans serviced were in the foreclosure process, compared to 1.22% in non-judicial states. States that utilize both judicial and non-judicial foreclosure processes had a foreclosure inventory rate closer that of to the non-judicial states at 1.43%.

“Incidences of mortgage payment stress are likely to continue their downward trend over the next couple of years. Mortgage interest rates are close to record lows and will rise only gradually as the Fed begins tightening policy,” Stansfield said. “As a result, affordability is very favorable by past standards and will remain so for the foreseeable future.

“What’s more, the labour market has continued to improve despite the slowdown in GDP growth at the start of the year. Indeed, our view that the unemployment rate will continue to fall is consistent with a steady pick-up in wage growth. It should deliver further improvements in the delinquency rate over the coming quarters,” Stansfield said.

At the state level, 27 states saw a decline in foreclosure inventory rates over the quarter. New Jersey, New York, and Florida had the highest percent of loans in foreclosure in the nation in the first quarter. Florida’s foreclosure inventory rate peaked at 14.5% in 2010, and was down to 4.8% in the most recent quarter, helped by rapidly improving local economies and job markets, leading to increased housing demand, strong home price growth, and more opportunities for distressed loans to be resolved.

On the other hand, New Jersey’s percentage of loans in foreclosure peaked at nine% in 2013, and even though the rate has decreased in recent quarters to 7.7%, improvement has been slow relative to other states due to New Jersey’s long foreclosure timelines and a less robust housing market. Foreclosure starts increased in 26 states, but this measure has become more volatile with state-level mediation requirements and changing servicing procedures dictating changes from quarter to quarter.

Legacy loans continue to account for the majority of all troubled mortgages.  Within loans that were seriously delinquent (either more than 90 days delinquent or in the foreclosure process), 73% of those loans were originated in 2007 or earlier, even as the overall rate of serious delinquencies for those cohorts decreases. More recent loan vintages, specifically loans originated in 2012 and later, continue to exhibit low serious delinquency rates.”

On a seasonally adjusted basis, the overall delinquency rate decreased 14 basis points to 5.54%.  For prime loans, the delinquency rate decreased seven basis points to 3.18% and for subprime loans the delinquency rate decreased 90 basis points to 17.60%. The FHA delinquency rate fell by 63 basis points to 9.10%. VA loans saw the only increase across loans types, increasing four basis points to 5.02% in the first quarter.

“The decline in mortgage payment problems is more good news for the housing market after the strong mortgage applications data released earlier today. The normalization in delinquency rates should in turn make lenders more confident about making a little more credit available and gradually relaxing terms, which should support an upturn in mortgage market activity this year,” Stansfield said.

The non-seasonally adjusted percentage of loans in foreclosure, also known as the foreclosure inventory rate, decreased to 2.22% on aggregate. Both prime and subprime loans had decreases, with the prime foreclosure inventory rate decreasing four basis points to 1.32% and the subprime foreclosure inventory rate decreasing 67 basis points to 8.96%. The foreclosure inventory rate for FHA loans increased 12 basis points to 2.64% while the rate for VA loans increased two basis points to 1.41%. 

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