WASHINGTON -- Industry observers took heart from the report by the Mortgage Bankers Association that loan delinquencies were flat during the first quarter. They took the numbers as a sign that consumers and lenders could have clear sailing well into next year.

The national MBA survey found that with homeowners reaping the fruits of lower monthly payments and better incomes, late payments on home loans were little changed in the first quarter from the previous quarter's 20-year low.

The survey, released last week, put the seasonally adjusted number at 4.12%, 3 basis points higher than the preceding quarter but 18 basis points lower than in the first quater of 1993.

The general improvement, however, has not affected all types of loans uniformly. Those insured by the Federal Housing Adminstration have had an erratic trend in delinquencies and remained at a relatively high 7.25% in the first quarter, up by just 1 basis point from the rate in the preceding quarter.

Late payments on coventional loans, by contrast, were at a comfortably low 2.62%, up 11 basis points from the level of the preceding quarter.

Analysts said the overall increase over the preceding quarter was statistically insignificant.

"All the conditions are right for low delinquencies -- improved employment conditions, lower debt service burdens, and rising home pricing, which is helping people build back equity," said Mark Zandi, chief economist at Regional Financial Associates in West Chester, Pa.

But analysts fear shortcuts that lenders are taking now to compete in a shrinking market will start to cost them, perhaps by the middle of next year when rising unemployment could precipitate credit problems.

Lenders are becoming "more aggressive" in originating loans, slashing start rates for adjustable-rate loans, and reducing down payments, said Mr. Zandi. They "will pay, but it won't be until later in the decade," he said.

Sung Won Sohn, chief economist at Norwest Corp., said mortgage bankers are tempted "to use every gimmick [they] can find" to qualify borrowers. Those gimmicks could backfire into problem loans in succeeding quarters, Mr. Sohn said.

Mr. Zandi believes that if Southern California's economy gets worse instead of better, the national delinquency rate will rise by yearend.

Delinquency rates -- the percentage of loans at least 30 days late -- in the western region reflected continuing problems in California in the first quarter. At 3.51%, they were 25 basis points higher than in the preceding quarter, and only marginally lower than a year earlier.

Through the economy and home sales are stronger in California, home prices are still falling. Tired of waiting for them to recover, many homeowners are choosing to go into deliquency, Mr. Zandi said.

"California is precariously balanced between recession and recovery," said San Francisco-based analyst Gareth Plank of Mabon Securities.

Any event that threatens Southern California's recovery, such as a tax hike, could push up delinquencies for portfolio lenders who are now competing on price, down payment, and underwriting standards, he said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.