Prime Mortgage Foreclosure Rate At Record High

At first the foreclosure wave was made up of subprime mortgages. People who couldn't really afford houses were given mortgages with very low introductory rates that adjusted several points higher a couple of years later.

If foreclosures were limited to that group, the crisis might not be as big as it is. But unfortunately, the foreclosure tsunami has rolled on to engulf a lot of homeowners with prime mortgages.

The evidence is contained in the latest mortgage delinquency report from the Mortgage Bankers Association (MBA). In many respects, the report is encouraging. The percentage of loans on which foreclosure actions were started during the third quarter was 1.34 percent, up from the previous quarter but lower than the third quarter of 2009.

The percentage of loans in the foreclosure process at the end of the third quarter was 4.39 percent, down from both the previous quarter and the same period a year ago. The seriously delinquent rate, the percentage of loans that are 90 days or more past due or in the process of foreclosure, was 8.70 percent, again, a decrease from both the previous quarter and the third quarter of 2009.

Mixed signals

That suggests that things are improving. However, the report also reveals that the foreclosure starts rate increased for all loan types and the foreclosure starts rate for prime fixed loans in particular set a new record high in the survey, as more loans entered the foreclosure process.

"Most often, homeowners fall behind on their mortgages because their income has dropped due to unemployment or other causes, said Michael Fratantoni, MBA's Vice President of Research and Economics.

Although the employment report for October was relatively positive, the job market improved only marginally through the third quarter. While there was a small improvement in the delinquency rate, the level of that rate remains quite high, according to Fratantoni. 

"As we anticipate that the unemployment rate will be little changed over the next year, we also expect only modest improvements in the delinquency rate, he said.

Foreclosure paperwork mess

Fratantoni said the foreclosure paperwork issues announced by several large servicers in late September and early October are unlikely to have had a large impact on the third quarter numbers, but may well increase the foreclosure inventory numbers in the fourth quarter of 2010 and in early 2011.  The foreclosure inventory rate captures loans from the point of the foreclosure referral to exit from the foreclosure process, either through a cure like a modification, a short sale or deed in lieu, or through a foreclosure sale. 

The servicers that halted foreclosure sales temporarily may show higher foreclosure inventory numbers in the fourth quarter of 2010 and in early next year than would otherwise have been the case.  Any drop in foreclosure sales over the next few quarters may actually reduce the inventory of homes on the market, with almost four million properties currently listed.  However, these foreclosed homes are likely to come on the market in the medium term, so it is only a delay rather than a change in the underlying economics.