The percentage of homeowners who were behind on their mortgage payments fell slightly in the first quarter, but an exodus by borrowers from loans insured by the Federal Housing Administration had a lot to do with the drop.
Meanwhile, the percentage of loans entering the foreclosure process rose slightly, and the number of loans in foreclosure set a record. The seasonally adjusted delinquency rate for one- to four-unit residential loans dropped to 4.52%, down one basis point from the fourth quarter and 13 basis points from the end of last year's first quarter, according to a Mortgage Bankers Association survey report released earlier this month.
It was the third straight quarter of declines. But delinquency rose compared with the fourth quarter in several subcategories, the MBA said. It rose two basis points for conventional loans, to 3.10%, and seven basis points for Veterans Administration loans, to 7.89%. FHA loan delinquency surged 20 basis points, to 11.65%.
On a teleconference call, Douglas Duncan, the association's chief economist, said many borrowers have been refinancing out of FHA loans. This, he said, means the FHA sector has been less of a factor in the overall delinquency rate, and it explains the apparent contradiction in delinquency trends.
"It's no mystery, even to the FHA" that the loans have grown less popular during the nearly three-year-old lending boom, Duncan said.
Low interest rates, surging home prices, improvements in underwriting technology, and new products spell more choice for borrowers who in the past would have had little to choose from besides FHA-insured loans, Duncan said. The borrowers who have replaced their FHA loans with other types of mortgages have been those least likely to miss payments, Duncan added. This causes an "adverse selection" for the government agency that ends up "leaving the remaining pool as a higher risk," he said.
Still, the trend brings down the overall delinquency rate, even if the composite number remains a good deal higher than the first quarter of 2000's 3.75%. The percentage of loans in the process of foreclosure at the end of the first quarter was 1.20%, up two basis points from the fourth quarter and the highest since 1972, when the association introduced the current version of the survey.
Duncan cautioned against reading too much into the high count of loans in the foreclosure process. In many places, he noted, it takes a long time for loans to work their way through the process, so the tally of loans in foreclosure includes some that have been there for a while. Consumer protection laws vary from state to state, he said, and so does the time a defaulted loan spends in foreclosure.
Credit Availability May Play Role
Duncan suggested that the record number of loans in the foreclosure process might reflect the growing availability of credit to borrowers with poor credit histories more than any worsening of borrowers' habits. "Part of what's driving the increase in the foreclosure number is the growth of the subprime market and its influence on the data," he said.
The rate of loans entering the foreclosure process inched up two basis points from the fourth quarter, to 0.37%, exactly where it was after the first quarter of 2002. Once loans enter the foreclosure process, the association stops counting them as delinquent.