The percentage of loans in foreclosure dropped 20 basis points (bps) on a seasonally adjusted basis in the third quarter of 2012 from the second quarter and was down 36 bps from the third quarter of 2011 according to the National Delinquency Survey, the results of which were released this morning by the Mortgage Bankers Association (MBA). 

The overall delinquency rate for one-to-four family homes fell to a seasonally adjusted rate of 7.40 percent in the third quarter, down 18 bps from the second quarter and 59 bps from one year earlier.  The decrease was driven primarily by a 54 basis point drop in delinquencies of 90 days or more year-over-year and 23 bps since last quarter.   The 30+ day delinquency bucket was up one basis point from last quarter on a seasonally adjusted basis but 29 basis point on an unadjusted basis. 

During a conference with reporters following the release of the data, MBA's Vice President of Research and Economics Mike Fratantoni attributed the increase in short term delinquencies both to seasonality, delinquencies tend to increase from the second to the third quarter, but also to the see-sawing job numbers.  Short term delinquencies are frequently affected by such fluctuations, he said, but he does not expect that rate to rise much further absent major economic problems.

Foreclosure rates and the foreclosure inventory both continue to drop.  The inventory rate is now at 4.07 percent, 20 bps lower than in Quarter 2 and 36 bps below the figure one year earlier.  Foreclosure starts are at a rate of 0.90 percent, down from 0.96 percent in the previous quarter and 1.08 percent in Quarter 3 of 2011.  Loans that are seriously delinquent or in foreclosure are at a rate of 7.03 percent compared to 7.31 percent in the second quarter and 7.89 percent in the third quarter of 2011.

The combined percentage of loans in foreclosure or at least one payment past due was 11.71 percent on a non-seasonally adjusted basis, down 9 bps quarter over quarter and 92 bps from the same quarter in 2011.

"Mortgage delinquencies decreased compared to last quarter overall, driven mainly by a decline in loans that are 90 days or more delinquent," observed Mike Fratantoni, MBA's Vice President of Research and Economics. "The 90 day delinquency rate is at its lowest level since 2008, and together with the decline in the percentage of loans in foreclosure, this indicates a significant drop in the shadow inventory of distressed loans-a real positive for the housing market. The 30 day delinquency rate increased slightly, but remains close to the long-term average for this metric. Given the weak economic and job growth in third quarter, it is not surprising that this metric has not improved. "

"The improvement in total delinquency rates was accompanied by a further drop in the foreclosure starts rate, which hit its lowest level since 2007. Moreover, the foreclosure inventory rate decreased by 20 basis points over the quarter, the largest quarterly drop in the history of the survey. The level however, is still roughly four times the long-run average for this series as we continue to see backlogs of loans in the foreclosure process in states with a judicial foreclosure system."

Loans originated in the 2005-2007 period continue, as they have from the beginning of the mortgage crisis, to make up the bulk of problem loans.  As seriously delinquent loans have declined from a rate of about 9.5 percent in the first quarter of 2010 to 7 percent in the most recent period, most of the change has been in that vintage which now represents 58 percent of the portfolio rather than the previous 72 percent.

Loans originated since that time, with stricter underwriting and perhaps because they are starting out in a better economic climate, are exhibiting a must better performance pattern.

FHA loans, as Fratantoni pointed out, have a different profile.  When private lending dried up in 2008 it was FHA that absorbed much of the lending and it is loans originated that year which are now causing problems in that portfolio.   FHA also appears to have course corrected and subsequent vintages are performing much better. 

The number of past due loans in the FHA portfolio dropped 75 bps since last quarter and are down 95 bps from a year earlier but are still at a rate of 11.14 percent.  Fratantoni said part of this was probably procedural as servicers moved some loans they had been holding back into foreclosure but some of the improvement probably reflects FHAs improving credit profile.  In response to a reporter's question, however, he declined to speculate whether the worst was over for the agency.

Fratantoni pointed to both the rapid drop in problem loans in several states that had suffered more than most during the foreclosure crisis.  While the percentage of loans in foreclosure have dropped 20 bps on a quarterly basis nationally, in California they were down 44 bps, in Mississippi 50, Arizona 73, and Florida 66. 

There is still a large discrepancy between foreclosure rates in judicial and non-judicial states.  The rate decreased slightly in judicial states to 6.6 percent but more sharply in non-judicial states to 2.4 percent.  MBA said the difference in the rates of the two regimes is at its widest since it started tracking in it 2006.

Fratantoni said, "If states delay initiating the foreclosure process, the 90 day delinquency rate goes up as new foreclosures are not initiated and these loans are held in the 90 day delinquency category. If the foreclosure process itself is slowed, the inventory rate goes up as the foreclosure timeline is extended and more loans are being held in foreclosure. The rate of new foreclosures started changes when procedures change. The foreclosure rates in Maryland, Washington and New Jersey continue to be impacted by state efforts to slow the foreclosure process and by servicers who have to adjust their internal foreclosure processes based on state requirements. As a result, these states often fluctuate between large increases in foreclosure starts accompanied by large decreases in 90 day delinquencies in a single quarter, or large increases in 90 day delinquencies accompanied by large decreases in new foreclosures started. This quarter, Maryland and Washington saw large decreases in new foreclosures started after significant increases last quarter. New Jersey led the increases in foreclosures started across every loan type, while seeing almost equally large decreases in loans that were 90 days delinquent."
Fratantoni said that looking forward MBA expects to see continued growth in jobs and continued and even accelerating improvements in the housing market.   While foreclosures will continue to work through the system, a more robust housing market will help improve the delinquency picture.