US Housing market : Begining of the End - Part 1 ( A-2 )

U.S. Home Mortgage Delinquencies Rose Again In Second-Quarter 2011 Due To The Weak Labor Market

U.S. residential mortgage delinquencies increased slightly for the second straight quarter after improving for three consecutive quarters in 2010, according to the Mortgage Bankers Association. We believe this trend could adversely affect underlying collateral performance of U.S. RMBS and the housing market. The latest national delinquency survey shows a modest increase in residential mortgage delinquencies and a drop in foreclosures in the second quarter.

The improving delinquency trends in 2010 pointed to U.S. homeowners having a better handle on their mortgage payments. However, the tides seem to be turning in a slightly negative direction in the midst of a weak labor market. The seasonally adjusted data shows that as of June 2011 8.44% of homeowners were delinquent, but not yet in foreclosure. This is up slightly from 8.32% in the first quarter, but down significantly from 9.85% a year ago. During the same period, the percent in the foreclosure process declined to 4.43% in the second quarter from 4.52% in the previous quarter, and 4.57% a year ago. Overall, short-term delinquencies are on the rise, but year-over-year trends are still positive, and foreclosures are somewhat flat on a year-over-year basis.

Key Highlights

• The total delinquency rate (30-day past due or worse, excluding foreclosures and REOs) for mortgage loans on one-to-four-unit residential properties increased to a seasonally adjusted rate of 8.44% of all loans outstanding at the end of second-quarter 2011, up from 8.32% in the first quarter and a decrease from 9.85% a year ago. The nonseasonally adjusted delinquency rate also increased 32 bps to 8.11% this quarter.
• Total delinquencies, excluding loans in the process of foreclosure, are near their late 2008 or early 2009 levels. Mortgage loans with only one payment (30-day) past due or short-term delinquencies are increasing.
• The serious delinquency rate (loans 90 days or more delinquent or in foreclosures) was trending down for six straight quarters, reaching the lowest level of 7.85% since March 2009. This translates into 3.44 million seriously delinquent mortgage loans based on MBA's mortgage universe for this survey as of the second quarter.
• During the second quarter, the percentage of loans in the foreclosure process--also known as the foreclosure inventory--was 4.43%, down from 4.52% in the first quarter and 4.57% one year ago. The foreclosure inventory rate for prime fixed loans decreased to 2.56% from 2.59% in the previous quarter. Also, the foreclosure starts rate of 0.96% is at its lowest level since late 2007.

We expect the high unemployment rate and high level of initial jobless claims to stifle any positive trends among delinquencies. Most often, homeowners fall behind on their mortgages because their income has dropped due to unemployment or other causes. The pattern of mortgage delinquencies typically tracks the pattern of unemployment (a correlation of 0.65) and initial jobless claims (a correlation of 0.57). Our regression model does not show any improvement in the third-quarter delinquencies. As such, we expect the unemployment rate to change very little this year and remain at 9.1%. However, those older-vintage mortgage loans that already went through a stressful economic period are now past the point where loans normally default. Furthermore, we expect that mortgage loans originated in recent years will have better credit quality than in the past due to tighter underwriting standards. On the other hand, recent increases in 30-day delinquencies undermine the signs of stabilization among recent vintage mortgages.

MBA's National Delinquency Survey

The MBA's National Delinquency Survey covers U.S. residential mortgage delinquency and foreclosure rates, which is based on a sample of approximately 44 million first-lien mortgage loans on one-to-four unit residential properties. These mortgages are approximately 90% of the outstanding mortgage market, and they are serviced by financial companies including mortgage companies, commercial banks, thrifts, and credit unions. The survey provides quarterly delinquency and foreclosure statistics at the national, regional and state levels. The next delinquency survey for third-quarter 2011 will be released in mid-November.