A Mix of Good and Bad News
By George Ratiu, Research Economist

There was good news and bad news on the home mortgage delinquency and foreclosure front earlier this month. Data for the second quarter of 2008 from the National Delinquency Survey by the Mortgage Bankers Association shows an increase in delinquency and foreclosure rates. On the positive side, however, the figures also point to some marked improvements. Delinquency rates for subprime, FHA and VA loans dropped from last quarter. Foreclosure inventory rates for FHA loans also declined on a quarterly basis. Furthermore, the data also recorded decreases in foreclosure rates for several states.

Delinquencies
The overall delinquency rate increased from 6.35 to 6.41 percent. However, the increase was driven by a jump in prime loan delinquencies - an increase of 22 basis points, up from 3.71 percent to 3.93 percent.

However, seasonally adjusted delinquency rates provided some positive highlights. The delinquency rates for all other loans dropped. Rates for subprime loans decreased 12 basis points (from 18.79 to 18.67 percent). The decline follows a 148 basis point increase reported in the first quarter. Declines were also noted for loans guaranteed through the two major government mortgage programs. Delinquency rates fell 40 basis points for VA loans (from 7.22 percent to 6.82 percent), while the rates for FHA loans declined from 12.72 to 12.63 percent.

Still, on a year-over-year basis, delinquency rates increased across the board. Seasonally adjusted delinquency rates moved up 120 basis points for prime loans, 385 basis points for subprime loans, five basis points for FHA loans, and 67 basis points for VA loans from the second quarter of 2007.

Foreclosures
Nationally, the rate of foreclosures started was up 20 basis points compared with that reported in the first quarter of 2008. In the second quarter of this year, the foreclosure starts rate increased from 0.54 percent to 0.67 percent for prime loans from a year ago. Foreclosures on subprime loans rose from 4.06 percent to 4.70 percent and from 0.50 percent to 0.65 percent for VA loans. FHA loans also posted an increase of 16 basis points in foreclosure starts -- from 0.87 percent to 1.03 percent. That increase follows a decline posted in the first quarter rate.

The foreclosure inventory rate also increased nationally for all loans, from 2.47 percent in the first quarter of 2008 to 2.75 percent in the second quarter of 2008. On a year-over-year basis, the foreclosure inventory rate increased 135 basis points (from 1.40 percent in the first quarter of 2008). The foreclosure inventory rate rose for all loans except FHA loans. The foreclosure inventory rate rose 20 basis points for prime loans, 107 basis points for subprime loans, and nine basis points for VA loans. Foreclosure inventory rates for FHA loans actually experienced a 16 basis point drop.

Mixed Regional Results
There were differences in delinquency and foreclosure rates by state. While delinquency rates rose across the country from the first quarter to the second quarter of 2008, not all states experienced the same pattern.

The top five states with the highest quarter-over-quarter increase in delinquency rates were Delaware (104 basis points), Mississippi (103 basis points), Massachusetts (100 basis points), Maryland (96 basis points), and Indiana (92 basis points). On the flip side, the states with the smallest change in delinquency rates were South Dakota (20 basis points), North Dakota (27 basis points), Wyoming (32 basis points), Colorado (33 basis points), and Oregon (34 basis points).

In terms of foreclosure rates, the national numbers masked surprising quarter-over-quarter regional changes. The rate of foreclosure starts dropped in 12 states from the first to the second quarter of 2008. Massachusetts recorded the largest decline-33 basis points - followed by Maryland (a 9 basis point decline) and Mississippi (7 basis point decline). The other states with declines in foreclosure starts were Nebraska, Arkansas, Texas, South Dakota, Missouri, Colorado, Montana, Michigan, and Louisiana.

Meanwhile, foreclosure inventory rates also dropped in 17 states over the first two quarters of 2008. Wyoming posted the greatest drop-24 basis points - followed by Massachusetts (declining 21 basis points), and Mississippi (a decline of 20 basis points). Foreclosure inventory rates also declined in Alabama, Arkansas, Indiana, Iowa, Kansas, Louisiana, Michigan, Missouri, Nebraska, North Dakota, Ohio, Oklahoma, South Dakota, and Texas.

These positive changes were nonetheless offset by foreclosure rate increases in states like Florida, Nevada, Arizona, California and New Jersey. These states experienced significant increases from the first to the second quarter of 2008, both in terms of foreclosure starts and foreclosure inventory rates. Florida posted the highest figures, with a 139 basis point jump in foreclosure inventory and a 35 basis point increase in foreclosure starts. The changes were similar in the other four states-Nevada (80 basis point change in inventory, 31 basis point change in starts), Arizona (68 basis point change in inventory, 29 basis point change in starts), California (73 basis point change in inventory, 23 basis point change in starts) and New Jersey (39 basis point change in inventory, 14 basis point change in starts).

Impact of Fannie/Freddie Takeover
Events in the capital markets during September have clearly overshadowed the mortgage delinquency and foreclosure report, which came out prior to the news about the federal government takeover of Fannie Mae and Freddie Mac. The obvious question arising from these events centers on the impact that this move will have upon the mortgage industry and the performance of existing and future loans.

While there are still a large number of details left to be resolved, much depends on the government's degree of involvement in Fannie and Freddie. Assuming that the Treasury and the Federal Housing Financed Agency (FHFA) increase liquidity in the two enterprises, we can expect mortgage rates to decline in the short run. FHFA can accomplish this through its authority to purchase a larger amount of mortgages, including the newly conforming jumbo loans (up to $625,000). In the long run, the performance of the mortgage market will likely be conditioned by the restructuring of Fannie and Freddie and the recovery of the housing market.

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Foreclosures are driving down prices in the last 12 months, with cities in the Sun Belt leading the decline. Real estate prices continued to post steep year-over-year declines during the three months ended June 30, according to a new report from the National Association of Realtors (NAR). Nationwide, the median single family, existing home price plunged 7.6% to $206,500 from $223,500 in the second quarter. The median

price is one in which half of all homes sold for more and half sold for less. A record numbers of foreclosures is helping to drive down prices, according to NAR. In fact, foreclosures and short sales accounted for about one third of all existing homes sales.

"In many areas with large concentrations of foreclosure sales, homes are being purchased below replacement cost values," said NAR president, Richard Gaylord. "Many buyers with long-term expectations are getting exceptional value in the current market."

Sun Belt metro areas led the decline. These areas ran up fabulous gains during the mid-2000s boom, but are experiencing even more severe declines during the bust.

In Sacramento, Calif. prices plunged 35.6% year-over-year to $$229,500. Cape Coral, Fla. recorded a loss of 33.1%, prices in Riverside, Calif. dropped 32.7%, and Los Angeles prices are down 29.6%. Las Vegas prices fell 23.6% and Phoenix was down 22.5% for the quarter.

More bargain hunting buyers are coming into the market, according to the Realtors. "The biggest home-sales gains over the previous quarter have been in some of the markets with the steepest and fastest price drops," said Lawrence Yun, NAR's chief economist. "Buyers in these areas are responding to deeply discounted home prices."

Existing-home sales increased 25.8 percent in California, 25.0 percent in Nevada, 20.5 percent in Arizona and 10.1 percent in Florida during the quarter.

The biggest regional home price declines have occurred in the West, where homes lost 17.4% of value to a median of $290,500. Prices in the South, at $177,000, were almost flat, down just 0.9%. The Northeast median home sold for $269,000, down 9.6%, and the Midwest came in at $161,500, down 4.1%.

Among metro areas, Yakima, Wash. posted the largest percentage increase. Prices there rose 8.9% year-over-year to $162,300. Binghamton, N.Y. was second with a price jump of 8.7% to $120,900.

Condo prices fell much less than single family homes, down just 3% year-over-year to $220,000 from $226,900. A couple of cities recorded double-digit condo price gains, led by Syracuse, N.Y., up 17.8% to $144,900, and New Orleans, up 15.9% to $192,100. Houston condos rose 9.9% to $141,100.