Rising unemployment is the biggest driver in the most recent increase in residential mortgage delinquencies, experts said.

"Obviously unemployment is an important factor," said Mortgage Bankers Association of America chief economist Douglas Duncan. He added that when people lose their jobs, it becomes harder to keep current with financial obligations, thus causing delinquencies.

According to the latest National Delinquency Survey (NDS) conducted by the MBA, mortgage delinquencies went up by 26 basis points to 4.63% in the second quarter of 2001.

Although the current rate has not reached the all-time peak of 6.07%, it is at a nine-year high. The mortgage delinquency rate reportedly reached 4.67% in 1992.

MBA also found that the percentage of mortgages on which foreclosure was started increased by five basis points to .36% while the percentages of loans in the foreclosure process rose by one basis point to .91%.

According to Duncan, the number of people without work has gone up to 4.5% this month from 3.9% in September last year. He said that unemployment is expected to rise to 4.8% or 4.9% by the end of 2001. The further uptick in unemployment rates is expected to drive the number of mortgage delinquencies higher over the next few quarters.

Aging effect

Aside from the rising number of people without jobs, the factor of the natural aging of loans has set in. There is currently a considerable number of mortgage loans originated in the1998-1999 cohort.

"Loans tend to be at their greatest likelihood of delinquency when they are into their third to fifth year," said Duncan.

As the life of the loan progresses, other factors which were not present during the creation of the mortgage come into play, such as changes in marital status and financial capacity of the borrower. A married couple may, for instance, start having kids and change from being a two-income household to just being a one-income unit.

Untested ground

Duncan said the effects of two factors - namely, the emergence and proliferation of new mortgage products over the last ten years as well as the substantial increase in the amount of technology used to assess risk - have not been tested in a downturn.

"It is possible that we haven't understood all the risks as well as we thought we had so we may see some impact on the general level of delinquencies that might be unexpected, though we won't know that yet in the next two to four quarters," Duncan said.

According to Duncan, a pertinent question would be: In the process of granting the approval to the loan, was there a change in risk-assessment just to qualify the borrower for the loan?

Duncan added that there is currently a whole slew of loan products that are specifically designed for higher-risk borrowers. These products account for the borrowers' relatively greater risk profile and yet are designed to make credit available to them.

"The question is: Is that a good tradeoff ?," said Duncan. "Are higher risk or more marginal borrowers better served or worse served by making credit available to them?"

He argued that it may be a case-by-case basis; some people probably made sure that they have shored up enough resources in the event of a downturn, while others probably have not.

Other data

Aside from the data mentioned above, the MBA also found that delinquency rates went up for each of the three loan types during the second quarter.

The rate for conventional loans was up by 16 basis points from the first quarter to 2.93%. Meanwhile the mortgage delinquency rates also rose for Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) loans. FHA and VA delinquencies went up to 10.79% (up 79 basis points) and 7.63% (up 41 basis points), respectively.

The NDS survey also showed that delinquencies for both fixed-rate loans and adjustable-rate mortgages (ARM) rose as well. The rate for fixed-rated mortgages rose to 3.79% (up 30 basis points) while delinquencies in ARMs rose to 5.96% (up 32 basis points).

According to the report, the inventory of mortgage loans in the process of foreclosure also rose for each of the loan types. For conventional loans, the increase was one basis point to 0.68%. The percentage of FHA and VA mortgages in foreclosure went up to 1.80% (up seven basis points) and to 1.20% (up three basis points), respectively.

The MBA surveyed 30 million loans on one-to-four-family properties. This reportedly makes up for almost half of all outstanding mortgages in the U.S.

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