The Mortgage Bankers Association's (MBA) quarterly National Delinquency Survey reported the delinquency rate for mortgage loans on one to four unit residential properties was 6.41% of all loans outstanding as of the end of 2Q08.
This is up six basis points from the first quarter and up 129 basis points from a year ago. The MBA noted that the increased was comprised primarily of increases in delinquencies for prime loans: 22 basis points for prime loans, negative 12 basis points for subprime loans, negative nine basis points for Federal Housing Administration loans and negative 40 basis points for Department of Veteran Affairs loans.
The percentage of loans in the process of foreclosure was 2.75%, 28 basis points higher from 1Q08 and 135 basis points from the 2Q07. The MBA also noted the percentage of loans on which foreclosure actions were started during the second quarter was 1.08%, up seven basis points from the previous quarter and 49 basis points from a year ago. The stats are all at record high levels.
By loan types, foreclosure starts on fixed rate prime loans rose five basis points from the first quarter to 34 basis points, while prime ARM foreclosure starts were up 26 basis points to 1.82%.
On the subprime side, fixed-rate and ARM foreclosure starts rose 27 basis points to 2.07% and 31 basis points to 6.63%, respectively.
MBA Chief Economist Jay Brinkmann noted that for the quarter, the majority of states saw little change in foreclosures.
"California and Florida alone accounted for 39% of all of the foreclosures started in the country during the second quarter and 73% of the increase in foreclosures between the first and second quarters," he added.
Of particular note was the increase in foreclosure starts in prime ARMs that include Option ARMs. The MBA believes the foreclosure start numbers "will likely be dominated increasingly by prime ARM loans." The two states of California and Florida accounted for 58% of all prime ARM foreclosure starts in 2Q08 and 78% of the increase in prime ARM foreclosure starts, the MBA said.
A Fitch Ratings report released this week also warned of increasing delinquencies in option ARMs resulting from recasts.
Fitch states this outlook is "a significant cause for concern for investors in option ARM RMBS."
Fitch calculated that around $29 billion, 16% of the total option ARMs outstanding, will recast by the end of 2009. Of this amount, they said, $6.6 billion consists of 2004 vintages that will reach their five year anniversary, but $23 billion consists of 2005 and 2006 vintages that will recast early due to hitting their balance cap limits. Option ARMs are subject to negative amortization and when it reaches a certain level, typically 110% to 125% of the original balance, the loan is "recast" and the new payment becomes fully amortizing to the loan maturity.
In 2010, Fitch forecasts around $67 billion of loans will recast, $37 billion of which are 2005 originations that will hit their five-year anniversary, and $30 billion of 2006 and 2007 vintages that will have hit their Negam limit.
Fitch's report also pointed out that many of the loans were underwritten to a stated income program and this increases the odds that the borrower will be unable to meet the new payment. They say that 83% of the loans from 2004 to 2007 originations were underwritten with less than full documentation.
Furthermore, many of the option ARMs from 2005-2007 vintages were originated with simultaneous second liens, which suggests low to no borrower equity in the homes, they said.
Fitch said it "anticipates performance to deteriorate further as the 2004 and 2005 vintages begin to recast over the next 18 months and borrowers are faced with sizable payment increase." The rating agency said that data suggests delinquencies are likely to double after recast.
While the MBA's report was discouraging and Fitch's adds to the prospect of ongoing home price declines, Brinkmann did try to address the question of "whether we are close to a bottom."
"The simple answer is that the idea of a national bottom is somewhat meaningless. Real estate markets are local and some markets are already improving," he said.
Specifically. he pointed out Michigan has had three consecutive quarters with little to no increase in its rate of foreclosures, while Massachusetts has seen a large drop in foreclosure starts. "Because of the sheer size of California and Florida, an improvement in the national numbers, whether delinquencies, home prices or any other measure, is unlikely until we see some turnaround in those two states," Brinkmann added.
