In a press release and subsequent press conference Thursday, the Mortgage Bankers
Association (MBA) cited fourth quarter 2004 figures in reporting a decline in
the rate of delinquent payments on and pending foreclosures
of residential mortgages since both the third quarter of 2004 and the end of
MBA's 132nd quarterly survey (dating back to1970) covers 38.7 million
first mortgages on one-to-four unit residential properties. The survey base
itself has increased dramatically, now reviewing the status of 500,000 more
loans than in the previous 2004 report and 1.5 million more than in the year-end
2003 survey. It now covers over 80 percent of the approximately 48 million mortgage
loans outstanding in this country, and includes more than half of the non-prime
MBA collects information by loan type (prime, sub-prime, fixed rate (FRM) and
adjustable (ARM) mortgages,) and by guarantor, (Federal Housing Administration
(FHA) and Veterans Administration (VA.)) Fannie and Freddie are included in
the prime figures. In other words, the survey is a pretty comprehensive picture
of what is going on out there.
Since the fourth quarter of 2003, delinquency rates (gathered in 30 day, 60
day, and 90 day plus "buckets) fell for all loans types. Prime loans were
down from 2.37 percent to 2.22 percent and sub-prime loans from 11.53 percent
to 9.88 percent. FHA loans were down two basis points to 12.21 percent, and
VA loans dropped 103 basis points to 6.96 percent.
Prime loans decreased both in the last quarter and the last year: fixed rates
down 11 basis points since the third quarter and dropping from 2.11 percent
to 2.04 percent, seasonally adjusted since 2003. ARMS were down 70 basis points
to 2.11 percent for the year; 12 basis points on a quarterly basis.
The real story, however, is the delinquency rates for sub-prime loans. FMAs
in this category were down 143 basis points (to 9.07) and ARMS a dramatic 338
basis points (to 9.52 percent) on an annual basis. Quarterly figures are -60
and -70 basis points respectively. MBA offered no specific explanation for these
State laws regarding foreclosures differ, and so does the time-line
for pending foreclosures which can take two or three year to resolve in states
utilizing a "judicial foreclosure process," Nonetheless, the "foreclosure
inventory," those homes that are in active foreclosure, has decreased
slightly (6 basis points to 0.49 percent) for prime loans and a rather dramatic
165 basis points for sub-prime.
Actual foreclosures also decreased for sub-prime loans. They were down 2.10
percent to 1.37 percent. Prime loan and VA foreclosures remained virtually unchanged
(0.20 percent and 0.48 percent respectively.)
Bucking the trend, however, were foreclosures of FHA loans. In the fourth quarter
of 2004 these set a record high rate of 0.91 percent, a steep increase of 14
basis points since 2003.
And, since last quarter, the seasonally adjusted percentage of new foreclosures
(those just moving from delinquent into the foreclosure inventory category)
increased 2 basis points for prime loans, 11 basis points for sub-prime, and
7 basis points for FHA loans while decreasing .03 percent for VA guaranteed
In a telephone press conference following the noon release of data, Doug Duncan,
MBA's chief economist and senior vice president commented on the figures
and made a few projections for the future.
Mr. Duncan cited the 4 percent growth in the U.S. economy during the fourth
quarter of 2004, the addition of 190,000 new jobs, and continued low interest
rates as major contributors to the improved delinquency rate. On-time mortgage
payments, he noted, constitute 96 percent of all payments. He predicted that
slow but steady economic growth and a commensurate increase in jobs would likely
mean continued declines in delinquencies for the next few quarters.
However, Mr. Duncan cited the need to monitor the many "young"
portfolios. The rash of new home purchases and refinances, particularly of the
cash-out variety, and the continued popularity of ARMs, may present problems
in the future. Historically, new loans perform well, but as they age more problems
arise. The very young loans that are out there in large numbers may prove vulnerable
to problems down the line. Cash-out loans were down .03 percent in the fourth
quarter (to 56% of all refinances, but still well above the 44% seen in 2003),
and ARMs continue to represent about a third of the mortgage market. ARMs may
present a risk if rising rates cause uncomfortable increases in monthly payments
once the initial loan period ends and rates adjust.
In response to questions, Mr. Duncan said that the spike in FHA foreclosures
is probably a result of declining "good credit" in the FHA loan
base. Private markets are producing new products that have eroded FHA market
share, computerized underwriting has moved some households out of the FHA customer
base into sub-prime or even prime markets, and rapid appreciation of house values
has allowed many FHA customers to refinance into conventional loan products.
Processing of FHA loans is also more expensive, leading lenders to steer away
from FHA loans where other options are available. The result, he said, is a
weaker or higher risk portfolio. This, he continued, is a problem that must
be dealt with and a task force is now studying the problem.
High real estate appreciation areas such as California have
been to an extent, immunized against delinquencies and foreclosures, presenting
homeowners with a ready market if they must bail out of mortgages because of
financial difficulties. As home value escalation slows, regulators should be
watching these high cost areas, alert to patterns in the composition of new
loans and any weakness in underwriting
The next MBA survey will be released in mid June.