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Number of Americans Behind on Mortgage Payments Dropped in 4Q 2010

Source: WSJ - Nick Timiraos

Posted on 18 Feb 2011

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Due to improved labor market conditions, the number of U.S. households behind on their mortgage payments fell during the fourth quarter to the lowest level in two years, according to the Mortgage Bankers Association (MBA) quarterly survey released Thursday.

The MBA suvey said that the share of loans where the borrower had missed at least one payment dropped to 8.2% on a seasonally adjusted basis, representing about 4.3 million households and the lowest level since the end of 2008.

The number of loans where the borrower had missed just one payment fell to the lowest level since the end of 2007.

But the number of loans in foreclosure remained at its highest level since the start of the mortgage crisis, in part because banks slowed their foreclosure processes late last year to fix document-handling problems that surfaced in September.

While the number of loans entering foreclosure fell, "loans were not exiting the foreclosure process," said Michael Fratantoni, an MBA economist. The result was an increase in the total inventory of loans in foreclosure.

Overall, some 12.9% of home loans were 30 days or more past due or in foreclosure at the end of December. That's down from 14% at the end of 2009 but still up from 11% at the end of 2008.

The figures provide the clearest indication yet that the mortgage crisis that began four years ago has stopped getting worse and is easing.

But the sheer volume of foreclosures still in the pipeline poses a significant challenge to housing markets across the country and is likely to keep pressure on prices. Prices tend to fall more quickly as the share of bank-owned and other distressed sales rises because banks are more motivated to sell.

Falling prices will also leave more borrowers in homes worth less than what they owe, making it hard for them to refinance or sell and putting them at greater risk of foreclosure if they face financial difficulties. That further underscores the importance of job growth.

"The mortgage market is going to reflect how the jobs market improves," said Jay Brinkmann, chief economist at the Mortgage Bankers Association.

"There are limits to what the housing market will do because it still comes down to the fact that you need a paycheck to make a mortgage payment."

The survey showed that 4.6% of all mortgages were in foreclosure at the end of December, matching the all-time high set in the first quarter of 2010 and up from 4.4% in the third quarter.

Florida remains the nation's hardest-hit state. More than 14% of all loans in Florida were in foreclosure at the end of December, and an additional 10% of borrowers had missed payments.

After Florida, the states with the highest foreclosure rates at the end of December were Nevada with 10.1% of loans in foreclosure, New Jersey with 7.3%, Illinois at 6.5%, and Arizona at 5.7%.

Foreclosure inventory remains particularly high in states such as Florida, New Jersey and Illinois, where banks must go to court before taking back homes.

While California still accounts for one in eight foreclosures nationally and has the second-highest rate of borrowers missing three or more payments, it had one of the smallest increases in foreclosure inventory. The state's total foreclosure inventory in the fourth quarter was below the national average for the first time since the mortgage crisis began.

Lenders have sharply tightened their standards over the past two years, and many of the loans made since late 2008 are expected to perform well.

Because so many risky loans from the bubble years have defaulted and have been replaced by more conservatively underwritten loans, "it would be shocking if delinquencies were not going down," said Thomas Lawler, an independent housing economist in Leesburg, Va.

The MBA survey showed that delinquencies were now falling among nearly all loan types. Absent another bout of rising unemployment, economists said that delinquency rates should continue to decline steadily.

One area of concern, however, are loans backed by the Federal Housing Administration. The share of those loans that were seriously delinquent- meaning the borrower has missed at least three consecutive payments or is in foreclosure-increased to 8.5%, up from 8.3% three months earlier.

The FHA has seen its share of the mortgage market grow sharply to around one quarter of the mortgage market, up from less than 2% of the market

in 2006. Loans backed by the agency are one of the few remaining ways home buyers can make low down payments.
Given the large number of loans insured within the past year, "it is surprising that the delinquency rate is increasing," said Mr. Fratantoni.