The delinquency rate for mortgage loans on one-to-four-unit residential properties stood at 4.95 percent of all loans outstanding in the fourth quarter of 2006 on a seasonally-adjusted (SA) basis, up 28 basis points from the third quarter, and up 25 basis points from one year ago, according to MBA's National Delinquency Survey, released Tuesday.
All major loan types exhibited increases, according to the MBA report, although both subprime and FHA loans demonstrated the most significant increases across credit classes. The delinquency rate for FHA loans reached a new record in the fourth quarter, according to the report.
The MBA survey is seen as the most comprehensive industry snapshot of loan delinquencies, with the fourth quarter results covering more than 43.5 million loans at nearly every major lender nationwide.
While delinquencies continued an upward hike, pending foreclosures also saw a significant uptick, increasing 14 basis points from the third quarter of 2006 to 1.19 percent of loans outstanding at the end of the year.
Perhaps most ominously for upcoming quarters, the MBA said the number of properties entering the forelcosure process during the fourth quarter consituted a record high, at 0.54 percent of all outstanding volume. Compared with the fourth quarter of 2005, the percentage of loans in the foreclosure process was up 20 basis points while the percentage of loans entering the foreclosure process was up 12 basis points.
"Although the U.S. economy and job market remain solid, the housing market continued to decelerate in the fourth quarter of 2006," said Doug Duncan, the MBA's chief economist and vice president of research. "Increases in delinquency and foreclosure rates were noticeably larger for subprime loans."
'The market is working'
In discussing the survey results, Duncan was quick to point to the market's retrenchment from subprime lending as an example of market discipline, in an effort to fend off a growing chorus of calls for federal regulation of lending standards.
"Credit spreads on lower-rated tranches of subprime securities widened appreciably over the quarter as investors demanded a higher return for exposure to this credit risk," Duncan said. "As we have noted before and as recent events have made clear, market discipline in this industry is swift, can be severe, and is more effective at changing lending practices than any potential changes in regulation."
"The market is working, culling over-capacity from the industry, as price signals from the capital markets lead to changes in product mix from originators, and directly and immediately impact the rates that mortgage lenders can offer to borrowers. Far from being a problem, these clear and effective market signals and actions will help the market to more efficiently regain its equilibrium."
Duncan also suggested that the current market turmoil might be short lived, a prediction likely to be welcomed both by market participants as well as homeowners alike.
"Given our macroeconomic forecast of below trend economic growth and a slowly recovering housing market, we would expect delinquency and foreclosure rates to level off as the housing market regains its footing towards the end of 2007," he said.
The MBA's numbers illustrate the clear problems the subprime industry has been facing as the new year has rolled around, providing delinquency and foreclosure numbers that literally skyrocketed relative to both year-ago and previous quarter reports.
Subprime delinquencies increased 77 basis points in the fourth quarter relative to the third quarter of 2006, reaching 13.33 percent of all subprime loans. Fourth quarter delinquencies on subprime loans were a staggering 170 basis points above year-ago levels for the same quarter.
Subprime adjustable-rate mortgages fared even worse than the subprime credit class in general, with 14.44 percent of subprime ARMs being reported delinquent at the time of the MBA survey (and increase of 122 basis points from the previous quarter).
Foreclosures on subprime loans were also up 67 basis points in the fourth quarter of 2006 relative to third quarter numbers, reaching 4.53 percent of all loans in the credit class. That rate was 120 basis points higher than the reported foreclosure rate for the fourth quarter of 2005.
Nation's Midwest continues to struggle
Across all loan types, the states with the highest overall delinquency rates were Mississippi (10.64 percent), Louisiana (9.10 percent), and Michigan (7.87 percent). Based on foreclosure inventory rates across all loan types, the top three states were Ohio (3.38 percent), Indiana (2.97 percent), and Michigan (2.39 percent).
The dubiously-affected states sit squarely in the nation's Midwest region, which has been beset by job troubles that haven't seemed to ripple though the nation's economy. A large percentage of economic output and job growth has been centered on that nation's East and West coasts, masking problems in the nation's heartland.
In spite of the troubles in the nation's Midwest, most U.S. states have felt the impact of the housing slowdown. the MBA reported that 49 out of 51 states saw their overall delinquency rate increase, while 44 states saw an increase in the rate of foreclosure inventory.
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