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Mortgage Delinquencies and Foreclosures

Feb. 22, 2008

Categorized in: Foreclosure

Tagged with: distress sale, foreclosure, preforeclosure

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Mortgage Delinquencies and Foreclosures: Third Quarter Data Show Increases in Both by George Ratiu, Economist, NAR Research

The numbers tell the story – more households are delinquent in their mortgage payments, and foreclosures are on the rise. According to data from the Mortgage Bankers Association’s (MBA) National Delinquency Survey,* the third quarter of 2007 recorded an increase in both mortgage delinquency and foreclosure rates.

First, let’s discuss mortgage loans outstanding. Nationally, the number of mortgages increased by 2.64 percent from that in the second quarter of last year; on a year-over year basis, the increase was 6.61 percent. Not all areas of the country exhibited the same level of activity. The states with the highest increase in year-over-year mortgage volume were Vermont (20.98%), Delaware (21.40%), South Dakota (25.57%) and North Dakota (27.41%). Meanwhile, two states experienced a drop in mortgages serviced compared with the second quarter—Idaho (-5.92%) and Utah (-1.83%).

Composition of the Mortgage Market
The composition of mortgage loans shifted from the second to the third quarter of 2007, with a one-percent drop in subprime loans being offset by a one-percent increase in prime mortgages. As of the third quarter, prime mortgages accounted for 78 percent of the total loans serviced. Subprime loans made up the second largest group of mortgages – 13 percent – followed by FHA loans (7%) and VA loans (2%). Keep in mind that these percentage breakouts pertain to homeowners who have mortgages. There are approximately one-third of homeowners who do not have a mortgage because they have paid it off.

Delinquency Rates
Mortgages with installments past due – i.e., delinquent – increased from 5.06 percent to 5.81 percent in the third quarter compared with the previous quarter. Year-over-year, the number of delinquent mortgages was up 27.89 percent. The one exception was the state of Louisiana which recorded a 7.11 percent drop in the number of Total Past Due mortgages, mostly fueled by a 42.36 percent decrease in mortgages with 90-day Past Due installments. The figure reflects past Katrina rebuilding activity in the New Orleans area.

Mirroring the upward swing in the number of delinquencies, foreclosure starts were also higher in the third quarter of 2007 than in the previous quarter or the third quarter of 2006. The number of foreclosure starts was up 35.70 percent compared with the level in the second quarter, and 76.93 percent higher year-over-year. In terms of numbers, there were 354,254 foreclosure starts in the third quarter of 2007 versus 261,063 in the prior quarter, and 200,223 in the third quarter of 2006. Nationally, there were nine states that posted more than a 100 percent increase in foreclosure starts.

It wasn’t all bad news. Indeed, there were some bright spots in this landscape. Three states experienced decreases in year-over-year foreclosure starts—Vermont (-26.28%), South Dakota (-16.99%), and Utah (-15.75%).

Foreclosure inventories also increased in the third quarter. They rose by 23.90 percent from the level in the second quarter. On a yearly basis, inventories were up 71.59 percent compared with the third quarter in 2006. The increase in foreclosure inventories was most severe in four states that experienced high home price appreciation coupled with speculative real estate investing—Arizona, California, Nevada and Florida.

Subprime Loans
The subprime fallout continues to have an impact. The number of subprime loans serviced nationally during the third quarter was down 3.45 percent from that in the second quarter. Compared with the previous quarter, every state recorded a decrease in the number of subprime mortgages, with Iowa, Kansas and Colorado posting the largest changes: -5.05%, -4.87%, and -4.27%, respectively.

In contrast with the decrease in the number of subprime loans serviced, the delinquency rate for subprime mortgages moved from 14.54 percent in the second quarter of 2007 to 16.68 percent in the third. Subprime mortgages also posted an upward swing in foreclosure starts—25.31 percent higher than in the second quarter, and 74.53 higher than in the third quarter of 2006.

Foreclosure inventories were 85.15 percent higher for subprime mortgages year-over-year. This increase was driven mostly by 13 states that posted increases of 100 percent or more—California, Nevada, Arizona and Florida among them. On the flip side, three states recorded drops in foreclosure starts for subprime mortgages on a year-over-year basis – Utah (-32.26%), Vermont (-51.39%), and South Dakota (-58.81%). Moreover, one other state – Montana – showed a decline in foreclosure inventories of 9.88 percent.

What it Means for the Housing Market
The increase in mortgage delinquencies and foreclosures are taking a toll on housing markets, particularly in states where rapid price appreciation combined with speculative investing led to the proliferation of subprime and adjustable rate mortgages. Looking forward to the months ahead, the states with high delinquency rates will continue to experience downward pressures on home prices. The passage of the national economic stimulus package is likely to mitigate some of the effects of rising delinquencies and foreclosures. Based on an economic impact study conducted by NAR, it is estimated that increasing the GSEs’ conforming loan limits would result in as many as 500,000 refinanced loans and a potential 210,000 reduction in foreclosures.

*MBA's National Delinquency Survey collects data from over 80 percent of about 50 million outstanding loans in the housing market. For more information, visit the Mortgage Banker's Association.

Reprint from online article at National Association of Realtors - Real Estate Insights

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