Led by adjustable-rate subprime loans, quarterly mortgage delinquency rose for the first time this year. And while an increasing share of subprime loans could make things worse, growing exotic loan originations shouldn't.
The rate of delinquency on one-to-four unit residential loans was 4.67 percent in the third quarter -- rising 28 basis points from the second quarter and 23 BPS above the level in the same period a year ago, according to the Mortgage Bankers Association's latest National Delinquency Survey.
"As we had expected, in the third quarter delinquency rates increased across the board," MBA Chief Economist Doug Duncan said in the announcement. "However, increases in delinquency rates were noticeably larger for subprime loans, particularly for subprime ARMs."
The delinquency for subprime loans surged 86 BPS from the prior quarter to 12.56%. ARM features were the main driver of subprime loans having delinquency and foreclosure measures higher than the second quarter and year-ago third quarter, Duncan noted in the survey conference call. Subprime ARM delinquency jumped 98 BPS during the quarter to 13.22%.
"This is not surprising given that subprime borrowers are more likely to be susceptible to the cumulative increases in rates we've experienced, and the slowing of home price appreciation that has resulted," Duncan added in the written statement. "It is important to remember that delinquency and foreclosure rates have been quite low the last two years."
Also, of the nearly 5 percent of borrowers who are having difficulty making their payments at the present time, 4 out of 5 of those will ultimately successfully make their payments, Duncan said.
Plus, subprime adjustable-rate mortgages comprise less than 7 percent of all outstanding loans. With delinquent subprime ARM borrowers being 13 percent of 7 percent of the total market place, "this, from our perspective, does not reflect a national macroeconomic problem," Duncan said, further noting that when analyzing that 34% of homeowners do not have mortgage, the subprime adjustable share of all homeowners lowers to about 4%.
All adjustable-rate and fixed-rate loans had higher delinquency rates than the previous quarter.
"We certainly believe that the data does show resets," the economist added.
MBA estimated that between $1.1 trillion to $1.5 trillion of residential debt is eligible to reset in 2007 due to adjustable rates in loan contracts, and some of this is occurring in the second half of this year. About $600 billion to $700 billion of that volume is expected to be refinanced before a reset, but the remainder will reset, and "part of that reset is driving increases in delinquencies in ARMs," Duncan explained. Other contributing factors, include a higher share of subprime ARMs, which have traditionally represented about 48 percent of total subprime market but recently, perhaps driven by house prices, has risen to 58%.
Across all loan types, the states with the highest overall delinquency rates were Mississippi, Louisiana and Michigan.
The inventory of loans in foreclosure was 1.05 percent, 6 BPS higher than the second quarter and 8 BPS above the third quarter a year ago, according to the report. The rate of subprime loans in the foreclosure process increased the most during the quarter -- by 30 BPS to 3.86% -- and increased the least -- 2 BPS -- for VA loans, according to the report.
Ohio had the highest foreclosure inventory rate, followed by Indiana and Michigan, MBA reported.
"We have no evidence that the increases we have seen in delinquency and foreclosure rates are the result of nontraditional products such as interest-only or payment-option mortgages," MBA said in the announcement. "These products have made up a significant portion of originations in recent quarters. However, we do not have and are not aware of information that would indicate significant deterioration in performance related to the nontraditional products."
It may be early to judge the full effects of recently originated nontraditional loans, but it is expected there will be only a marginal addition in foreclosures and delinquencies from such loans, Duncan said, noting that nontraditionals that have been securitized indicate that they're performing according to expectations and that is also the case in nontraditionals that have reset.
"We expect the housing market to fully regain its footing in the middle of 2007," Duncan said in the written statement. "In the meantime, we anticipate some further increases in delinquency and foreclosure rates in the quarters ahead."
Among the primary reasons Duncan has cited for expected delinquency increases is the significant growth in the subprime market share, currently representing 12% to 13% of total outstanding loans.
The latest NDS results covered over 42.6 million loans, of which 32.6 million prime loans, 5.8 million were subprime, and the rest government loans. The subprime loans represented about 80 percent of the total subprime market, Duncan said.