RealEstateEconomyWatch.com

In the fourth quarter of last year, more homeowners—nearly 8 percent—were delinquent on their mortgages than 1972, when records were first kept.

The jump in delinquencies from third to fourth quarter also set a record for the largest quarter-to-quarter increase on record.

Delinquencies on one-to-four-unit residential properties rose to a seasonally adjusted rate of 7.88 percent of all loans outstanding as of the end of the fourth quarter of 2008, up 89 basis points from the third quarter of 2008, and up 206 basis points from one year ago, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey.

The delinquency rate includes loans that are at least one payment past due but does not include loans somewhere in the process of foreclosure. The percentage of loans in the foreclosure process at the end of the fourth quarter was 3.30 percent, an increase of 33 basis points from the third quarter of 2008 and 126 basis points from one year ago. The combined percent of loans in foreclosure and at least one payment past due was 11.18 percent on a seasonally adjusted basis and 11.93 percent on a non-seasonally adjusted basis. Both of these numbers are the highest ever recorded in the MBA delinquency survey.

Jay Brinkmann, MBA’s chief economist and senior vice president for research and economics attributed the increase in delinquencies to factors that had nothing to do with the economy. State and local moratoria on foreclosures, the holiday halt on foreclosures by Fannie Mae and Freddie Mac, a general reluctance by servicers to proceed with evictions in the last few weeks of December and a slowing down caused by an overburdened legal process in some areas created a backlog of delinquencies. “Foreclosure inventory jumped sharply in the fourth quarter even though the rate at which loans were entering foreclosure remained unchanged,” he said.

The percentages of loans 60 days past due, loans 90 days or more past due, and loans in foreclosure all set new record highs, breaking records set last quarter. The percentage of loans on which foreclosure actions were started tied the record set in the first quarter of 2008. The percentage of loans 30 days past due is still well below the record set in the first quarter of 1985.

“The rate of new foreclosures has remained essentially flat for the last three quarters of 2008. This might be seen as a good sign for mortgage performance, but most other measures point to exactly the opposite conclusion. The percentage of loans 90 days or more past due jumped sharply in the fourth quarter. Normally servicers would have initiated foreclosure actions on a significant portion of these loans but delayed doing so for a variety of reasons, including working on loan modifications, complying with the guidelines of different investors, and various delays in different locales. In addition, some servicers report a spate of borrowers running their accounts 90 days delinquent in order to qualify for certain modifications,” Brinkmann said.

Delinquencies are still dominated by subprime ARM loans and prime ARM loans, which include Alt-A and pay option ARMs. Nationwide, 48 percent of subprime ARMs were at least one payment past due and in Florida over 60 percent of subprime ARMs were at least one payment past due.

However, the mix of loans in delinquency is shifting away from those tied to the structure and underwriting quality of loans to mortgage delinquencies caused by job and income losses. For example, the 30-day delinquency rate for subprime ARMs continues to fall and is at its lowest point since the first quarter of 2007. Absent a sudden increase in short-term rates, this trend should continue because the last 2-28 subprime ARMs (fixed payment for two years and adjustable for the next 28 years) were written in the first half of 2007. The problem with initial resets is largely behind us, although the impact of the resets was generally overstated, Brinkmann said.

“The delinquency rates continue to climb across the board for prime fixed-rate and subprime fixed-rate loans, loans whose performance is driven by the loss of jobs or income rather than changes in payments,” Brinkmann said.

The shifting nature of delinquencies from those caused by loan type to those linked to the recession and unemployment is a not good news for the Obama Administration’s foreclosure prevention plan, which will modify mortgages to a monthly payment level that borrowers can afford. Unemployed borrowers may not have the income to make a loan modification work.