Us mortgage delinquency reaching pre recession level

US Mortgage Delinquency – Reaching Pre-recession Level

Sutherland Banking Insights

April 2014

US Mortgage Delinquency – Reaching Pre-recession Level Overview Five years after the end of the US subprime crisis, the number of US citizens who are behind on their mortgages and inventory of homes in the foreclosure process are finally reaching pre-recession levels.

Crippled US housing market has started recovering over the past year and a half, with prices rising, inventory tightening and foreclosures easing. Struggling homeowners have seen their finances go up by rising home values, an improving job market and efforts to restructure home loans so as to make them more affordable. All these have enabled them to make timely mortgage payments. According to National Association of Realtors, the US unemployment rate plunged to 7.2% in September, the lowest since November 2008. The median US home price rose 12.5% in the third quarter from a year earlier.

US mortgage delinquency rate for subprime loans that are two months behind the payment but not yet in foreclosure fell to 1.26% of loans in the third quarter of 2013, down from 1.43% a year ago and the lowest since the early months of recession in the first quarter of 2007. In 2013, all the US states recorded a lower delinquency rate compared to the previous year. Florida and New Jersey recorded the highest delinquency rate of above 10%, while the lowest rate was recorded in North Dakota at 1.4%.

Another significant driver in the improved delinquency rate is decrease in the number of seriously delinquent mortgages made before 2008, as most of these mortgages have been sold or foreclosed upon. According to OCC Mortgage Metrics, the number of loans in the process of foreclosure at the end of the second quarter of 2013 fell to 744,369, a decrease of almost 39.8% from a year ago. Loans issued since the 2008 crisis adhere to the bank’s tight lending standards and are less likely to default.

The report outlines the trend in the US mortgage delinquency rate before the crisis (2004-07), during the crisis (2007-12) and post crisis (2013), citing the reasons for the rise and fall in the rate.

“The speed of the decline in the foreclosure rate is faster than I anticipated. The strength of the housing recovery is benefiting the distressed portion of the market, clearing it up more quickly.”

– Michael Fratantoni, VP - Research and Economics, Mortgage Bankers Association

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US Mortgage Delinquency Rate by Risk Category and Duration Mortgage Delinquency Rate for 60 days Mortgage Delinquency Rate – 60 Days, by Risk Category 4% 3.71% 4% 3.03%

3% 3% 2%

1.64%

1.64%

2% 1%

0.93%

1%

1.19% 0.33% 0.11%

0% 2005

2006

2007

2008 Alt-A

2010 Prime

2011

2012

2013

Sub Prime

With the US subprime crisis coming to the surface in 2007, the delinquency rate for all mortgages showed an upward trend to peak in 2009. The subprime and Alt-A loans were majorly affected by the crisis and increased at a basis point of 300 from 2007 to 2009.

While delinquency rates on prime loans are significantly lower than those on subprime loans, they also increased substantially. For example, among prime loans, mortgage payment for 60 days due made in 2005 was 0.11% delinquent. While in 2008 this rate increased by 1%, which further rose to 1.64% in 2009.

From 2012 onwards, the delinquency rate started decreasing and in Q3 2013 the delinquency rate for all mortgages reached at the pre-recession level as job gains help borrowers keep up on the payments while rising home prices enable others to sell.

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Mortgage Delinquency Rate for 90+ days Serious Mortgage Delinquency Rate – 90 days+, by Risk Category 40% 35% 30.17%

30% 25% 20%

17.11%

18.55%

15%

15.87%

10% 5%

9.59% 4.33% 0.90% 0.35%

0% 2005

2006

2007

2008 Alt-A

2010 Prime

2011

2012

2013

Sub Prime

*Includes mortgage payment default for 90+ days, foreclosures and REO

According to Mortgage Bankers Association, about 77% of loans that are seriously delinquent were originated in 2007 or earlier.

The percentage of home loans that were more than 90 days behind or in the foreclosure process or REO fell to their lowest level in the third quarter 2013 after almost 3.5 years.

The Alt+A and subprime seriously delinquency rate continued its downward trend in the third quarter, dropping to 24.07% and 29.10% compared to 28.25% and 32.90, respectively, during the same period a year ago. The decline marked the ninth consecutive quarter in which the rate of borrowers behind on their home payments by 90 days or more has decreased.

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US Mortgage Delinquency Rate by State Seriously Delinquency Rate by State (2011- 13)

In 2013, mortgage delinquency rate in every state, particularly in Puerto Rico and D.C., has declined compared to the previous year. In the last three years, the biggest declines were seen in Arizona and California with seriously delinquent rates plunging by almost 50-60%.

In 2013, Florida and New Jersey had the highest serious mortgage delinquency rate at 13.2% and 12.35%, respectively. North Dakota had the lowest mortgage delinquency rate at 1.40%, followed by Wyoming with 1.94%.

“Mortgage loans originated in the last few years have significantly higher credit quality than those originated prior to the recession, with delinquency rates that resemble those seen seven to 10 years ago. As older mortgages continue to slowly exit the system, the industry will experience continued declines in mortgage overall delinquencies." – Steve Chaouki, Head of Financial Services, TransUnion

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Conclusion Improving economic conditions, servicing transfers, home retention efforts, and home forfeiture actions contributed to the better performance of home mortgages in 2013. As seriously delinquent mortgages continue to be sold or foreclosed, the industry will experience further declines in the overall delinquency rate in future.

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