Could it really be the beginning of the end of the foreclosure crisis?
Jay Brinkmann, the Mortgage Bankers Association's chief economist, postulated Friday that a dip in the share of homeowners who were 30 to 60 days behind on their mortgage payments in the fourth quarter was "a concrete sign that the end may be in sight." Normally, short-term mortgage delinquencies spike at the end of the year.
Because 30-day delinquencies are a leading indicator of more serious problems down the road, the 16 basis point drop in this rate from the third quarter, to 3.63%, is the best news the mortgage industry has seen on the foreclosure front in nearly three years.
Only three times in the nearly 40-year history of the MBA's delinquency survey has the rate dropped between the third and fourth quarters, Brinkmann said. "With fewer new loans going bad, the pool of seriously delinquent loans and foreclosures will eventually begin to shrink," he said. "It also gives us growing confidence that the size of the problem now is about as bad as it will get."
Others were skeptical.
Alan White, a professor at Valparaiso University School of Law, said that while a drop in 30-day delinquencies is encouraging, he would want to see at least two to three quarters of significant declines before declaring a turn. "It's a positive sign but I would not jump to the conclusion that we're out of the crisis yet," he said.
Celia Chen, a senior director at Moody's Economy.com, said the drop in early-stage delinquencies reflects lenders' tightening of underwriting guidelines in the past two years. Chen pointed to more distressing figures in the MBA's survey, including the share of loans in foreclosure, which set a new record of 4.58% in the fourth quarter, up 11 basis points from the previous quarter. "We still have a ways to go before we're going to see an improvement in foreclosures," she said.
The percentage of loans that were 90 days or more past due also hit a record 9.67% in the fourth quarter, up 82 basis points. Brinkmann said this "far exceeds anything the industry has seen in the past."
Loan-modification efforts have created a large backlog of loans that are 90 days or more past due but have not been through the foreclosure process. Even after being modified, a loan stays in this category until the borrower has made three consecutive payments under the new terms.
Steve Berg, the managing director of applied analytics at Lender Processing Services Inc. in Jacksonville, Fla., said there were 2.9 million seriously delinquent loans at the end of January, up by almost half from a year earlier. The average number of days that loans in this category had been delinquent rose to 272 from 211, he said.
White pointed to the Treasury Department's report Wednesday on the administration's loan modification program, which showed the average borrower had a total debt-to-income ratio of 59.7% after receiving a permanent mod. (To put that number in perspective, private mortgage insurers today will allow a maximum debt-to-income ratio of 41% on new loans.)
Such a heavy debt load may doom those borrowers to redefault, White said.
"Americans are deeply in debt, and that debt is not being whittled down very quickly," he said. "I just don't think this is a good time for happy talk because we have a serious residential mortgage and consumer debt problem."
Brinkmann said short-term delinquencies appear to be tracking new unemployment claims, which had fallen for 19 straight weeks before rising slightly at the end of January.
A bigger, looming problem is that serious delinquency appears to be tracking long-term unemployment, which is at its highest point since 1948, he said.
"Long-term unemployment and long-term delinquency numbers are moving in tandem and what ultimately resolves that is either a pickup in foreclosures, or in jobs."