U.S. residential mortgage delinquencies declined this quarter following two back-to-back quarterly increases, while foreclosures started this quarter increased after declining for three straight periods, according to the Mortgage Bankers Association (MBA). We believe declining delinquencies represent a slightly positive trend for the underlying collateral performance of U.S. RMBS and the housing market. While serious delinquencies were roughly flat in the third quarter, higher foreclosure starts suggest a gradual improvement in the foreclosure inventory, in our view.
The seasonally adjusted data show that 7.99% of homeowners were delinquent but not yet in foreclosure as of September 2011. This is down from 8.44% in the second quarter, and down significantly from 9.13% a year ago. During the same period, the percent in the foreclosure process (or foreclosure inventory) remained unchanged at 4.43% in the third quarter and up slightly from 4.39% a year ago. Overall, short-term or early-stage delinquencies are decreasing, and year-over-year trends are positive.
- The total delinquency rate (30-day past due or worse, excluding foreclosures and REOs) for mortgage loans on one-to-four-unit residential properties declined to a seasonally adjusted rate of 7.99% of all loans outstanding at the end of third-quarter 2011, down from 8.44% in the second quarter and a decrease from 9.13% a year ago. On the other hand, the nonseasonally adjusted delinquency rate increased 9 basis points (bps) to 8.20% this quarter.
- Total delinquencies, excluding loans in the process of foreclosure, are near their late 2008 or early 2009 levels. Mortgage loans with only one payment (30-day) past due or short-term delinquencies are also improving.
- The serious delinquency rate (loans 90 days or more delinquent or in foreclosures) increased 4 bps to 7.89% in the third quarter, after trending down for six straight quarters and reaching the lowest level of 7.85% in the second quarter since March 2009. This translates into roughly 3.82 million seriously delinquent mortgage loans based on MBA’s mortgage universe for this survey as of the third quarter.
- During the third quarter, the percentage of loans in the foreclosure process–also known as the foreclosure inventory–remained unchanged from the second quarter at 4.43%, but slightly higher than 4.39% one year ago. In addition, the third-quarter foreclosure starts rate increased 12 bps to 1.08% from 0.96% in the previous quarter, but remained near their lowest level since early 2009.
A weak labor market and a high level of initial jobless claims remain key concerns for further improving the positive delinquency trends. Homeowners usually fall behind on their mortgages as unemployment or other job-related factors affect income. The pattern of mortgage delinquencies typically tracks the pattern of unemployment (a correlation of 0.66) and initial jobless claims (a correlation of 0.57). Our regression model does not show any improvement in fourth-quarter delinquencies. As such, we expect the unemployment rate to change very little this year and remain near 9%. On the other hand, those older-vintage mortgage loans that already went through a stressful economic period are now past the point where loans normally default. We generally expect that mortgage loans originated in recent years will have higher credit quality than in the past due to tighter underwriting standards.
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