Will Rising Mortgage Delinquencies Reignite Foreclosures?

Mortgage delinquencies in the real estate market (NYSE:IYR) rose during the second quarter, though home foreclosures continued to decline. The delinquency rate for mortgages on one- to four-unit residential properties climbed from 8.32% in the first quarter to 8.44% in the second. While the delinquency rate remained well below the 9.85% witnessed during the second quarter of 2010, the small increase shows that downward trend experienced through most of 2010 has come to an end, and mortgage delinquencies are no longer improving.

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The increased delinquency rate could be tied to numerous “troubling economic data” reported during the second quarter, according to Mike Fratantoni, vice president of research and economics at the Mortgage Bankers Association, which compiled the report based on 88% of all outstanding first-lien residential mortgages in the country. Fratantoni particularly cites the lack of job growth needed to push down the unemployment rate. The national unemployment rate, based on the number of claims for unemployment insurance, rose from 8.8% at the beginning of the last quarter to 9.2% by the end.

The silver lining in the MBA’s report is that long-term delinquencies continued to decline, with the percentage of mortgages 90 or more days past due falling from 8.1% in the first quarter to 7.85% in the second. In the second quarter of 2010, that rate was 9.11%. The percentage of outstanding mortgages entering the foreclosure process also fell, from 1.08% in the first quarter to 0.96% in the second, and down from 1.11% in the second quarter of 2010, to their lowest level since the fourth quarter of 2007. The total percentage of mortgages at any stage in the foreclosure process fell from 4.52% to 4.43% last quarter, also down from 4.57% during the year-earlier period, to their lowest rate since the third quarter of 2010.

While many are concerned that the data might be misleading, Jay Brinkmann, chief economist of the MBA, says, “the idea that there is a growing backlog of loans being held back from foreclosure is simply not supported by these numbers.” Brinkmann doesn’t believe that the drop in foreclosures is only temporary, but the MBA’s own statistics show that many new delinquencies will ultimately end up as foreclosures, and any inference made upon that data would have foreclosures rising within the next few months as now newly delinquent properties enter the foreclosure process.

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Still, the fact that seriously delinquent mortgages, foreclosure starts, and total foreclosures all declined in the most recent quarter demonstrates a positive trend. Whether that trend will continue remains to be seen. Brinkmann does say that the majority of seriously delinquent loans originated between 2005 and 2007. In total only 30% of all mortgages originated in the two years leading up to the financial crisis, but those 30% accounted for 65% of seriously delinquent loans. Loans issued since 2008 are “showing much better performance” says Brinkmann.