Mortgage Delinquencies Decline, but Doubt Remains

Although mortgage delinquencies and foreclosure proceedings appear to have passed their peak, this small improvement in the shaky housing market may not be enough to quell fears about the strength of the economic recovery.

Mortgage delinquencies — the share of outstanding loans with at least one payment past due  —  dropped to a seasonally adjusted rate of 9.9 percent in the second quarter of 2010, from the first quarter’s high of more than 10 percent, the Mortgage Bankers Association (MBA) said Thursday. The “seriously delinquent” rate, which includes loans 90 days or more past due and those already in foreclosure, declined to 9.1 percent from 9.5 percent, the first decline since early 2006 and the largest quarter-to-quarter drop since 2005. 

“This improvement is likely a result of servicers pursuing modifications and seeking out less costly alternatives to foreclosure, such as short sales and [other] arrangements,” economist Mark Zandi of Moody’s Economy.com told The Fiscal Times. Paul Dales, who follows the U.S. economy for London-based Capital Economics, says modest rises in employment and incomes and some stabilization in house prices may have contributed to the decline in delinquencies.

However, delinquency and foreclosure rates remain at historic highs, reflecting continued weakness in the labor market, as well as households with excessive debt and homeowners with mortages that exceed the value of their homes, also known as “underwater mortgages.”  The “seriously delinquent” rate compares with an average 1.7 percent in the 25 years before 2007 — when the housing market collapsed.

The MBA report also said the rate of short-term, or 30-day, delinquencies rose for the first time in a year, to 3.51 percent, which may ultimately drive foreclosure rates up. Short-term delinquencies are closely tied to the unemployment rate, which has hovered around 9.5 percent, and many economists predict it will rise. 

“Ultimately the housing story, whether it is delinquencies, home sales or housing starts, is an employment story,” said Jay Brinkmann, MBA’s chief economist . “Only when we see a consistent increase in employment will we see an increase in sales and starts, and a sustained improvement in the delinquency numbers.”

More than 5 million homes are delinquent on their mortgage in some form and some 2.5 million are already in foreclosure. The percentage of borrowers who received a foreclosure notice fell slightly from the previous quarter, its first drop in four years. While the delinquency report is a small improvement, about 4 million borrowers who are more than 90 days delinquent or in the foreclosure process may lose their homes later this year, putting downward pressure on home prices, Zandi said. 

Meanwhile, mortage rates are falling. In its weekly survey, mortgage giant Freddie Mac said the average rate on 30-year fixed-rate mortgages fell for a ninth straight week, to 4.36 percent, from 4.42 percent last week. Amy Crews Cutts, chief economist with Freddie Mac, attributes the recent slowdown in sales, a 27 percent drop for existing homes in July, to the recently expired homebuyer tax credits, which pulled future home sales into the first half of the year.

The Obama Administration has moved  to help struggling homeowners with mortgage payments, but initiatives haven’t been entirely successful. A report issued by the Treasury Department last week showed that nearly half of the 1.3 million homeowners who have enrolled in the Home Affordable Modification Program (HAMP), which make mortgages more affordable, have dropped out since March 2009. That suggests that about 630,000 people who tried to reduce their monthly mortgage payments through HAMP couldn’t sustain mortgages even with reduced payments.

Economists and investors are focused on what Federal Reserve Chairman Ben Bernanke will say in his speech tomorrow morning in Jackson Hole, Wyo., where he is expected to outline how the Federal Reserve can help boost an ailing economy and a fragile housing market.

Related Links:
Mortgage Rates Fall to a Record (Bloomberg)
Mortgage Delinquencies Higher in Dems’ Districts (Wall Street Journal)
Housing Market Continues to Decline (Christian Science Monitor)