Going Up: Mortgage Delinquency Rates on the Rise

The latest reports on troubled mortgages do not paint a pretty picture. The Mortgage Bankers Association (MBA) announced Sept. 5 that the rate of delinquencies and new foreclosures …

The latest reports on troubled mortgages do not paint a pretty picture. The Mortgage Bankers Association (MBA) announced Sept. 5 that the rate of delinquencies and new foreclosures on residential real estate loans continued to rise in the second quarter of 2008, and Sept. 10 the association said that commercial and multifamily real estate loan delinquencies also were up. The default rate for commercial/multifamily mortgages remains at or near historically low levels, the association noted, but even so, the news wasn’t good.

As late as May or June 2007, analysts were pointing to the low rate of commercial/multifamily delinquencies as an indication that the economy was fundamentally sound, but then the rates started creeping up and analysts took notice. In response, the MBA began releasing quarterly reports on commercial lending delinquency data collected on five groups of loan holders: commercial mortgage-backed securities (CMBS), life insurance companies, Fannie Mae, Freddie Mac and FDIC-insured banks and thrifts.

In the latest report, Jamie Woodwell, MBA’s vice president of commercial real estate research, said that “commercial/multifamily mortgages are not seeing the same kinds of deterioration in performance that single-family mortgages, construction and some other types of loans have seen.” Performance in this sector  “generally remains strong and well within expectations,” Woodwell said.

Commercial/multifamily delinquencies

In a nutshell commercial and multifamily mortgage delinquency rates, while still relatively low, were higher in the second quarter than they were in the first. Specifically:

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  • The 30+ day delinquency rate on loans held in CMBS was 0.53 percent in the second quarter, up 0.05 points from the first quarter.
  • For Fannie Mae multifamily loans, the 60+ day delinquency rate rose to 0.11 percent, up 0.02 points.
  • Among commercial and multifamily mortgages held by life insurance companies, the >60-day delinquency rate was at 0.03 percent, up 0.02 points. To put this in context, MBA said, only 23 of 35,276 loans were delinquent more than 60 days.
  • The rate for loans held by FDIC-insured banks and thrifts that were delinquent more than 90 days was 1.18 percent, up 0.17 points. Of a total $1.2 trillion in loans, only $15 billion was delinquent that long, MBA said.
  • Only on Freddie Mac loans did the rate actually fall, ending down 0.01 point at 0.03 percent.

The MBA stressed in its first commercial/multifamily report, released in March, that delinquency rates on CMBS-held loans at year end 2007 were lower than they had been at year end for nine of the previous 10 years, while life company-held loans were at their lowest delinquency rate in 11 years. Of the five groups, only the rate on loans held by FDIC-insured banks and thrifts was not near its lowest point in 10 years.

Residential delinquencies and foreclosures

The report on residential mortgage delinquencies and foreclosures was considerably gloomier, and even the mortgage bankers had trouble putting a positive spin on the numbers. The delinquency rate for loans on one- to four-family properties was 6.41 percent at the end of the second quarter, up 6 points from the first quarter and 129 points year-over-year. The foreclosure rate was up 28 points in the quarter and 135 points in a year, ending the second quarter at 2.75 percent. During the quarter 1.08 percent of loans entered the foreclosure process, up 7 points from first quarter and 49 points from second quarter 2007.

MBA Chief Economist Jay Brinkmann noted that the rise in foreclosure rates was driven by a worsening situation in the hardest-hit states, California and Florida. And the association’s release said that only eight states had foreclosure start rates above the national average. In addition to California and Florida, the other six states are Arizona, Indiana, Michigan, Nevada, Ohio and Rhode Island. Brinkmann said adjustable-rate mortgages (ARMs) accounted for 59 percent of loans entering foreclosure.

In an interesting twist on mortgage delinquency studies, Experian reported Sept. 8 that when money is scarce and choices have to be made, small business owners with severe mortgage delinquencies are more likely to make payments on their business loans than their mortgages. Experian found that “because of deteriorating equity, high mortgage payments and limited refinancing options, business owners chose to ensure the business’ survival, preserving their source of income at the risk of losing their home.”

What’s ahead?

Mortgage delinquency rates tell about trouble after the fact, so it might help to consider a few forward-looking reports to put the bad news into context. Business leaders see higher capital spending through the end of the year “despite the lingering housing recession,” Business Roundtable Chairman Harold McGraw III said Sept. 11 in releasing the group’s quarterly CEO Economic Outlook Index.

In a more concrete release related to mortgages, MBA reported that mortgage activity is increasing and loan rates are falling. The market composite index, which measures mortgage loan application volume, was up in the first week in September, both week-over-week and on a four-week moving average. Interest rates on 30-year fixed rate mortgages decreased to 6.06 percent from 6.369 percent, while 15-year fixed loans fell to 5.73 percent from 5.96 percent and one-year ARM rates declined to 7 percent from 7.11 percent.

MBA’s Brinkmann noted, however, that national numbers aren’t always relevant in looking at real estate trends. “Perhaps the question most asked these days is whether we are close to a bottom,” he said. “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.”

For example, he noted that Michigan has gone three quarters with little or no increase in foreclosure rate, while Massachusetts showed a large drop last quarter. “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 said.

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