The rate of mortgage loans entering the foreclosure process during the second quarter broke a new record, the Mortgage Bankers Association said Thursday, and the worst may be yet to come.
The rate of loans entering the foreclosure process hit a record 0.65 percent, compared with 0.58 percent during the previous quarter and .43 percent during the second quarter of 2006.
In releasing the results of its latest delinquency survey, the MBA said the record rate of loans entering the foreclosure process was driven by data from four states where investors and speculators were particularly active during the boom: California, Florida, Nevada and Arizona.
Those states have more than a third of the nation’s subprime adjustable-rate mortgages (ARMs) and foreclosure starts on subprime ARMs, and are also responsible for most of the nationwide increase in foreclosures, the MBA said.
“Were it not for the increases in foreclosure starts in those four states, we would have seen a nationwide drop in the rate of foreclosure filings,” said MBA Chief Economist Doug Duncan.
Nationwide, the percentage of all loans in the foreclosure process during the second quarter was 1.4 percent, up from 1.28 percent in the first quarter and 0.99 percent last year.
The second-quarter delinquency rate — which does not include loans already in the process of foreclosure — was 5.12 percent, compared with 4.84 percent in the first quarter and 4.39 percent a year ago.
At the request of the Federal Reserve, Duncan said the MBA analyzed the percentage of loans in default held by people who don’t live in the home that secures the loan.
In Nevada, 32 percent of purchase loans 90 days past due or in foreclosure were used to buy investment properties or second homes, the MBA found, compared with 13 percent nationwide. One in four defaulted purchase loans in Florida and one in five in California were on “non-owner-occupied” homes.
Home prices fell during the second quarter in 52 of the 59 metropolitan statistical areas tracked by the Office of Federal Housing Enterprise Oversight in California, Florida, Nevada and Arizona, and investors are much more likely to default if they see the value of their properties fall, Duncan said.
In the rest of the country, Duncan said 34 states actually saw decreases in the rate of new foreclosures, and other states saw “very modest” increases.
But the latest survey covers only April through June — before worries about rising delinquencies and defaults and investments backed by mortgage loans caused Wall Street investors in August to stop buying securities backed by all but the most conservative loans.
“Upwards of 40 percent of (loan) production has gone away,” Duncan said. “The only part of the securitization market that is functioning is for conforming, conventional, FHA and VA loans. Even prime adjustable-rate loans are not being purchased by investors for securities — they’ve simply left the marketplace.”
As a result, Duncan said, the upward trend in delinquencies and foreclosures may continue for up to a year.
“We do not yet believe we have seen the peak,” Duncan said. “There is some hope that will occur within the next two to four quarters.”
Much depends on what happens with interest rates, and how much monthly payments increase for borrowers with 2/28 hybrid ARMs when their interest rates reset, Duncan said.
There are two components to interest-rate resets — “teaser rate” adjustments, which typically take place within 30 to 180 days, and the index adjustment that takes place after two years on a 2/28 loan when the rate goes from a fixed to variable rate.
All the teaser rates on 2/28 loans originated in 2005 and 2006 have expired, and many loans originated in 2005 have experienced an index adjustment.
“What we don’t know is what the index resets will look like for the remaining loans of the 2005 and 2006 book,” because they depend on fluctuating interest rates, Duncan said.
If the impending adjustments to the index rates on 2/28 loans turn out to be smaller than the payment shock from teaser-rate adjustments, “we have seen the peak of delinquencies and foreclosures,” Duncan said.
If the economy slows and unemployment picks up, the Federal Reserve could lower interest rates. The Mortgage Bankers Association projects that the Fed’s Open Market Committee will lower the federal funds rate by 25 basis points at each of its next two meetings, Duncan said.
But an economic slowdown and a rise in unemployment could also worsen delinquency and foreclosure rates, Duncan said, with those issues already the primary driver of foreclosures in states like Indiana, Ohio and Michigan. The percent of mortgages in Ohio that are 90 days or more past due or in foreclosure — 5.2 percent — is more than twice the national average.
Nationwide, the delinquency rate on prime loans was up 15 basis points from the previous quarter, to 2.73 percent. That compares with 14.82 percent for subprime loans. The delinquency rate for subprime loans was up 105 basis points from the previous quarter and 312 basis points from a year ago.
The delinquency rate for FHA-backed loans rose from 12.15 percent in the first quarter to 12.58 percent in the second quarter, while the delinquency rate on VA loans fell 34 basis points, to 6.15 percent, during the same period.
The survey covers more than 44 million first-lien mortgages, or more than 80 percent of about 50 million outstanding loans. Of those, about 14 percent, or 6.2 million, are subprime.
“While the headlines have rightly been focused on (foreclosures) in subprime adjustable-rate mortgages, oftentimes the larger picture is missed,” Duncan said.
Duncan said many of the loans not captured in the survey are made by small banks in rural areas that tend to have more conservative underwriting standards, so “our numbers would overstate delinquencies and foreclosures.”
About one in three homeowners don’t have mortgages because they own their homes outright, Duncan said. Of those who do have mortgages, 93.48 percent are making timely payments, he said.