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Mortgage Delinquencies and Foreclosures on the Rise

Late payments and new foreclosures on U.S. homes rose in the third quarter and are likely to grow as a massive wave of adjustable-rate mortgages reset at higher interest rates, the Mortgage Bankers Association said on Wednesday.

Delinquencies rose for all home loans, but most notably for adjustable loans to subprime borrowers who were already stretched before mortgage rates climbed, the industry trade group said in its quarterly National Delinquency Survey.

Still, the share of late payments and foreclosures will stay relatively low as the housing market regains its footing in the middle of next year, and will have a limited impact on the overall economy, the MBA said.

"Only 7% of all loans out there are subprime adjustable loans. We're talking about a 12% delinquency rate on 7% of all home mortgages, and the foreclosure rate is much lower than that," said MBA Chief Economist Doug Duncan. "So in terms of a macro-economic event, if that's what everyone's concerned about, we don't see that happening."

The mortgage delinquency rate rose to 4.67% in the third quarter, from 4.39% in the prior quarter and 4.44% in the third quarter of last year. The higher rate is roughly at the 20-year average, according to Duncan.

"This is really going to hurt the people that experience these delinquencies and foreclosures more so than the aggregate economy," said Matthew Moore, economic strategist at Banc of America Securities.

Historically, late payments and foreclosures are tame; income growth remains robust and the unemployment rate is at a low 4.5%, he added. "Aside from your overextended household in certain markets, the consumer is very strong," said Moore.

Delinquency rates on prime mortgages rose to 2.44% from 2.29%; subprime rose to 12.56% from 11.7%.

New foreclosures on houses rose to 0.46% from 0.43% both in the prior quarter and a year earlier.

The rate climbed to 0.19% from 0.18% on prime loans and rose to 1.82% from 1.79% for subprime.

The figures are seasonally adjusted.

The MBA predicts that between $1.1 trillion and $1.5 trillion of mortgages face rate resets next year. Up to $700 billion of those loans will be refinanced, while up to $800 billion will adjust at less-affordable rates.

"Chances are that we're seeing the leading edge of that reset wave coming through," Duncan said.

Greater fallout in the subprime arena was widely expected. Many borrowers used extremely low teaser rates to get into homes they would otherwise be unable to afford after home prices surged by double digits annually for five years.

Subprime borrowers "are more likely susceptible to the cumulative increases in rates we've experienced, and the slowing of home price appreciation that has resulted," Duncan
said. Still, "it is important to remember that delinquency and foreclosure rates have been quite low the last two years."

The MBA said it saw no evidence of riskier, non-traditional loans like payment-option or interest-only mortgages driving delinquencies and foreclosures higher in the third quarter.

LOW LONG-TERM RATES TEMPER PAIN

Short-term rates have jumped since the bulk of current adjustable-rate mortgages were created.

The Federal Reserve has raised its federal funds rate to 5.25% from 1% since June 2004, aiming to thwart inflationary pressures.

Holders of mortgages that started with extremely low teaser rates are starting to see the effects of the credit tightening as their mortgages adjust.

"We expect the housing market to fully regain its footing in the middle of 2007," he added. "In the meantime, we anticipate some further increases in delinquency and foreclosure rates in the quarters ahead."

The Fed on Tuesday kept rates unchanged at 5.25% for a fourth straight policy meeting. But the central bank cited its view of "substantial" cooling in the U.S. housing sector.

While short-term rates have jumped, longer rates have stayed relatively low. Average 30-year loans hover around 6%.

The MBA early Wednesday reported mortgage applications in the latest week jumped to the highest level in over a year, boosted in part by borrowers refinancing out of adjustable
loans to lock in low long-term rates.