WIs it possible that the sluggishness of the foreclosure pipeline is actually camouflaging low mortgage delinquency rates?  TransUnion raised the possibility yesterday in a presentation at its Financial Services Summit.  Its analysis showed that stubbornly high delinquency rates may actually be as low as those of 10 years ago when those mortgages that had been in the system for 180 days or more are accounted for.  

In its regular delinquency report issued on May 8 the company said the 60+ day delinquency rate in Quarter One was 4.56 percent, an improvement of 21 percent year-over-year and 12 percent from the 4^th Quarter of 2012 and said both changes were the largest for the respective periods it had observed since it began tracking the data in 1992.  Still the Quarter One rate remained more than double the pre-crisis "norm" even when both auto and credit card delinquencies were well below 1 percent and had been hovering near record lows for three years.

"Some people may see the high overall mortgage delinquency number and worry that mortgage borrowers are still a bad credit risk; but we don't believe that's the right conclusion," said Tim Martin, group vice president of U.S. Housing in TransUnion's financial services business unit. 

It is no surprise that the mortgages originated during the last years of the housing boom have caused most of the problems with delinquency and foreclosure.  TransUnion says that, as of this past February mortgages originated before 2009 make up 50 percent of all outstanding mortgages but 86% of all mortgage delinquencies.  Twenty percent of the loans originated in 2007 have been delinquent at one time or another, 14.5 percent of them within their first three years.  Loans originated in every year since then shows a declining rate of delinquency at every "age" compared to the 2007 vintage.  For example, loans originated in 2010 had experienced only about one-sixth the delinquencies by their third year as the 2007 vintage.  

The company also found that the number of days a mortgage was reported as delinquent to a credit bureau before it either cured or was foreclosed has increased dramatically.  TransUnion provided this "snapshot" of delinquent loans as they would have appeared in 2007 and earlier this year.

TransUnion conducted an analysis that excluded loans that were more than 180 days past due and concluded that the mortgage delinquency rate would have peaked in 2009 at about 3.05 percent rather than the actual peak of 6.89 percent and would have been approximately 1.68 percent in the first quarter rather than 4.56 percent. The last time the mortgage delinquency rate was lower than 1.68% occurred in the second quarter of 2003 (1.67%).

TransUnion repeated this analysis for select states based on their individual cure or foreclosure time lines and found that those states with the longer timelines for each would have the largest improvements in delinquencies if these timelines were rolled back to 180 days.  Looking at Q3 2012 data, New York would have a 1.64 percent delinquency rate rather than 5.48; Florida's rate would be 2.21 percent rather than 11.0 and the Illinois rate would be 1.78 percent rather than 5.32 percent.   

"It's no longer a credit quality or home price depreciation issue, and we are not adding many new delinquent mortgage borrowers into the pool these days," said Martin. "Instead, it's an issue of the timelines to cure or foreclose. We are simply not draining the pool very fast; and the size of the 'drain' varies significantly by state."

Martin said that low interest rates and the implementation of new mortgage servicing rules may be helping borrowers to more quickly work their way through the system.  "Our analysis shows that if we were at more traditional Cure of Foreclose timelines, then we could already be reporting mortgage delinquency rates as being back to 'normal.'"