Loan modifications are being credited with playing a key role in the improving delinquency picture for home mortgages, but housing economists and analysts caution that the industry isn't out of the woods quite yet.
Even though loan mods are supplying some relief to beleaguered consumers (and servicers), many restructurings ultimately fail - and with unemployment expected to remain high throughout the year, some market participants are revising their forecasts for continued improvement.
Residential delinquencies and foreclosures on all mortgages fell in the second quarter on a sequential basis for the period ending June 30, but the elevated level of late payments has the industry grappling with $963 billion worth of troubled loans.
The national delinquency rate fell to 9.85% at June 30 compared to 10.06% at March 31, according to figures compiled by the Mortgage Bankers Association (MBA). A year ago delinquencies stood at 9.24%.
Foreclosures started during the quarter fell to 1.11% of outstanding loans, an improvement over the March 31 reading (1.23%) as well as the year-ago figure of 1.36%.
New figures from TransUnion echoed what the MBA found - that delinquencies declined in the second quarter.
The Chicago-based company predicted that the 60-day mortgage delinquency rate will likely continue to drift downward in 2010, possibly nearing 6.4% nationally by yearend.
"The second-quarter decline in mortgage delinquencies gives further credence to the notion that the credit market is stabilizing," said F.J. Guarrera, vice president in TransUnion's financial services unit. "Although this is good news for the consumer, the economy is still burdened by high unemployment, upcoming ARM resets and a glut of foreclosures."
MSN estimated that consumers owed $9.85 trillion on their home mortgages at June 30.
Based on the MBA's delinquency number, that means $963 billion of all home mortgages are in some stage of delinquency, be it 30-, 60- or 90-days late or in foreclosure.
A report from CoreLogic found that 11 million - or 23% of all residential properties with a mortgage on it - had negative equity at June 30. At March 31, some 24% of mortgagors were underwater.
While modifications are getting some credit for the improving late figures, their failure rates remain less than encouraging. MBA chief economist Jay Brinkmann said the failure rate on any modified loan ranges from 40% to 60%.
(Of course, loan mods are a relatively new phenomena in mortgage banking. The practice was basically forced upon lenders by Congress.)
"Modifications always improve the situation but whether or not they improve it enough to bring down the number of delinquencies and foreclosures depends on the relative size of the modifications to the rest of the market," he said.
The fact that both the 90-plus-day and foreclosure start rate fell means that "a significant number of these seriously delinquent loans have been successfully modified" and reclassified as performing, Brinkmann argued.
The MBA is concerned that some of the catalysts behind current improvements may not continue through 2010.
"It will largely be dependent on what happens with the jobs market," he said.
"Given some of the economic numbers that have come out in the last month or so," he said, various entities including the MBA "are having to rethink" their forecasts.
In addition, there was some bad news in the report concerning Federal Housing Administration (FHA)-backed mortgages: the percentage of loans in arrears rose to 13.29% at June 30, up from 13.15% at March 31. However, a year ago the FHA delinquency rate was higher a 14.42%.
According to the MBA, subprime delinquencies account for the worst reading among different mortgage types with 27.02% of outstanding loans in arrears.
Roughly 7.1% of prime loans were late at June 30.
State-by-state, delinquencies continue to vary widely. According to Trans-Union, delinquency rates in the second quarter remained highest in Nevada (15.86%) and Florida (15.02%).
States with the lowest percentage of arrears include North Dakota (1.61%), South Dakota (2.23%) and Nebraska (2.61%).
TransUnion predicted that by yearend Florida will have the highest delinquency rate in the nation at 16.2%. North Dakota, it believes, will have the lowest rate, 1.5%. Twelve states showed increases in delinquencies from the first quarter with Rhode Island (4.63%), New Mexico (4.45%) and Washington (3.39%) leading the pack.
Measures of later-stage mortgage delinquency, such as the ratio of borrowers 90 or 120 or more days past due, provide additional positive news. For the first time since before the recession began in 2007, these later-stage delinquencies have now both declined nationally from where they were in the first quarter.
Guarrera said "it is ironic" that, with record-setting low interest rates, a large inventory of homes and low prices, more consumers are not considering a home purchase the investment opportunity it was considered in the past.
"Tighter lending standards and increased documentation scrutiny have made it difficult for many consumers to qualify for a mortgage," he said.