Foreclosure and Delinquency Information for Q3 from the MBA - Things are Getting Worse

The following is a very good summary of the foreclosure and delinquency situation in the US. Things are not expected to get much better in 2008.

Admittedly, the ARM interest rate freeze was just announced by President Bush and Secretary Paulson, but I do not see this as a done deal, yet. For a variety of legal and political reasons, the interest rate freeze is not as clean as the press would let on. I am looking forward to the analysis that will appear in the WSJ tomorrow. Other relatively "responsible" business publications such as the Economist, Business Week, Bloomberg, CNNMoney.com, Market Watch, etc. will also have an excellent analysis of the announcement.

By the way, hats off to the MBA (Mortgage Bankers Association) for not trying to spin these numbers into a bunch of optimistic baloney that other trade groups commonly do. Text in bold is my emphasis. From Market Watch:

The rate of loans entering the foreclosure process during the third quarter, as well as the percent of loans in the foreclosure process during that time, were at the highest levels in the history of the Mortgage Bankers Association's quarterly delinquency survey, the group reported on Thursday.

The rate of loans entering foreclosure was a seasonally adjusted 0.78% of all loans on one- to four-unit residential properties, up from 0.65% in the second quarter (that is up 20%). The rate is up from 0.46% a year ago, according to MBA statistics (up 70%).

The percentage of loans at some point in the foreclosure process was 1.69% of all loans outstanding, up from 1.40% (up 21%) in the second quarter. A year ago, the percentage of loans in the foreclosure process was 1.05% (up 61%).

The delinquency rate on mortgage loans was 5.59% in the third quarter, up from 5.12% in the second quarter -- moving the rate up to its highest level in the survey since 1986. The rate of delinquency was 4.67% a year ago.

The survey covers 45 million mortgages on one- to four-unit residential properties, representing more than 80% of all outstanding U.S. first-lien mortgage loans, according to the MBA. It has been conducted quarterly since 1972.

"We said they would be getting worse and we anticipate they will be getting worse... at least two more quarters," said Jay Brinkmann, the MBA's vice president of research and economics, in a telephone interview.

Overall, the MBA is projecting a total of 1.5 million foreclosure starts for all of 2007, up from 960,000 in 2006 and 704,000 in 2005, Doug Duncan, MBA chief economist, said during a conference call with reporters.

Adjustable-rate loans are performing "much, much worse than their fixed-rate counterparts," Brinkmann said. Subprime ARMs accounted for 43.0% of all new foreclosures during the third quarter, even though they make up just 6.8% or all loans outstanding. Prime ARMs made up 18.7% of the foreclosures started and make up 14.5% of all outstanding loans. (Subprime ARMs really are the problem, just as everyone said they would be.)

But there also has been some spillover into fixed-rate mortgages held by homeowners who need to sell but can't because they live in depressed housing markets, Brinkmann said. Problems were exacerbated by mortgage issues that began over the summer, which severely restricted borrowers' ability to secure a nonconforming loan, one that doesn't meet the criteria to be purchased by loan agencies Fannie Mae or Freddie Mac.

Prime fixed-rate loan foreclosure starts increased to 0.22% in the third quarter, up from 0.18% in the second quarter, while prime ARM starts increased to 1.02%, up from 0.62% the previous quarter. Subprime fixed-rate foreclosure starts were 1.38%, up from 1.35%, and subprime ARM foreclosure starts were 4.72%, an increase from 3.84% in the second quarter.

"This is the first quarter which registers the full combined effects of the seizure of the nonconforming securitization market, broad-based home price declines, continued weakness in some regional economies and rate adjustments on monthly payments," Duncan said in a news release. "The predictable results are increased delinquency and foreclosure."

That said, certain areas of the country are affecting the foreclosure statistics more than others.
Florida and California have the most mortgages outstanding and are key drivers of the increase in foreclosure rates, the MBA said. California and Florida have 36.4% of all the prime loans in the country and have 42.4% of the country's foreclosure starts for prime ARMs. The two states have 28.1% of all subprime ARMs and 33.7% of the foreclosure starts for that type of mortgage. The number of subprime ARM foreclosure starts in California during the third quarter equaled the starts in 35 other states combined.

In those and other states, overbuilding created difficult selling conditions for people who are finding it impossible to keep their homes. They also had a high number of investors buying properties in the boom years earlier this decade.

Elsewhere, local economic issues are costing people their homes. Areas of the Midwest, including Michigan and Ohio, are seeing drops in employment and population -- and the supply of homes far exceeds the demand for them at their current prices.

According to research from Lehman Brothers, about 2.8 million subprime mortgages are scheduled to reset in 2008 and 2009 to a mortgage rate about 30% higher.

"This will ultimately lead to a jump in foreclosures as many of these borrowers cannot afford the higher payment and will have a difficult time refinancing or selling their home," the Lehman Brothers note said. "Since foreclosures typically sell at about a 25% to 30% discount from market clearing prices, this will put downward pressure on home prices. We look for national home prices to fall at least 15% from peak to trough as the housing recession continues to weigh on the economy." (Personally, this is optimistically low. Something on the order of a 25% decline is more likely.)

The MBA is predicting that the housing market won't bottom nationally until late next year, due to the heavy amounts of inventory lingering out there. But oftentimes the supply of homes is underestimated because the figures don't take into account foreclosures that aren't being marketed by a real estate agent, Duncan said.

Home-price drops, as well as employment gains and real household income gains are necessary to improve affordability conditions and work off supply, Duncan added.

"It certainly is severe and the most severe we've had in some time," he said of the housing downturn. "It's a swinging of the pendulum from the biggest expansion we've had in a long time as well. The pendulum is swinging back the other way."