Mortgage Delinquencies, Foreclosures Surge

Aug. 20, 2009— -- The Mortgage Bankers Association reports that a record 1 in 7.6 homeowners with a mortgage were either late making a payment or in foreclosure from April to June while delinquencies have expanded to prime loans.

The trade group's quarterly National Delinquency Survey reviews 45 million loans that represent 80-85 percent of all outstanding first mortgages. It found that 9.24 percent of all mortgage holders were at least one month late making a payment and 4.3 percent of loans were in foreclosure.

"Florida continues to establish itself as the worst state in the union for mortgage performance, closely followed only by Nevada," said Jay Brinkmann, chief economist at the trade association.

In a sign that has troubled many economists, an increasing number of mortgage holders with prime loans – those provided to people with good credit who made down payments – were delinquent.

5.23 percent of prime fixed rate mortgages were delinquent making payments compared with 3.07 percent a year ago.

12.21 percent of prime adjustable rate mortgages (ARM) were delinquent making payments compared with 7.49 percent a year ago.

"There has been a dramatic shift away from subprime ARMs being a driver problem to prime fixed rate ARMs," said Brinkmann.

Plunging home prices and homeowners out of work are believed to play a large role in this increase. As prices drop, many economists have forecast a surge in the number of mortgage holders underwater, where they owe more than their home is worth. Karen Weaver, an analyst at Deutsche Bank, recently estimated that 48 percent of all mortgage holders will be underwater by the start of 2011. This is an increase from the bank's current estimate that 27 percent of homeowners owe more than their home is worth.

That reality could lead to foreclosures continuing to rise in the months ahead despite an increase in modification programs.

"It is unlikely we will see meaningful reductions in the foreclosure and delinquency rates until the employment situation improves," said Brinkmann. "In some areas where a number of borrowers have mortgages that are larger than the current value of their homes, any life events such a divorce or loss of a job are likely to translate into foreclosures until prices in those areas recover, not just flatten."

Subprime loans are also still a mess.

23.6 percent of subprime fixed rate mortgages were delinquent making payments compared with 16.02 percent a year ago.

27.36 percent of subprime adjustable rate mortgages were delinquent making payments compared with 21.03 percent a year ago.

The number of foreclosures started during this period was essentially the same compared with the first three months of this year. The trade group said there was a "major drop" in foreclosure rates of subprime adjustable rate mortgages. That was offset, however, by a significant increase in prime fixed-rate mortgages entering the foreclosure process.

The group, which represents mortgage lenders and servicers, also had a comment about modification programs.

"While the various loan modification programs continue to have an impact on holding foreclosure rates below where they otherwise would be," Brinkmann said in a statement, "the issue is that many of the foreclosures involve homes that are vacant, borrowers who no longer have jobs, or loans where there was fraud involved. Therefore, in measuring the effectiveness of industry or government loan modification programs it is necessary to compare the results not with the total foreclosure and delinquency numbers reported here but with the smaller subset of borrowers who can and want to qualify."