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Fourteen percent of all American mortgages are either delinquent or in the process of foreclosure.

Unemployment Drives Record Mortgage Delinquencies

Fourteen percent of all American mortgages are either delinquent or in the process of foreclosure and the outlook is that delinquencies will get worse before they get better, according to the latest Mortgage Bankers Association’s (MBA) National Delinquency Survey.

Job losses, not risky subprime loans, are driving up delinquencies and foreclosures to record levels. However, not until the economy begins creating more jobs than it terminates will the housing picture improve, said Jay Brinkmann, MBA’s Chief Economist.

Loans delinquent 30 days or more as of the end of the third quarter rose to nearly ten percent of all mortgages. The non-seasonally adjusted delinquency rate increased 108 basis points from 8.86 percent in the second quarter of 2009 to 9.94 percent this quarter. The combined percentage of loans in foreclosure or at least one payment past due was 14.41 percent on a non-seasonally adjusted basis, the highest ever recorded in the MBA delinquency survey.

“Job losses continue to increase and drive up delinquencies and foreclosures because mortgages are paid with paychecks, not percentage point increases in GDP. Over the last year, we have seen the ranks of the unemployed increase by about 5.5 million people, increasing the number of seriously delinquent loans by almost 2 million loans and increasing the rate of new foreclosures from 1.07 percent to 1.42 percent,” said Jay Brinkmann, MBA’s Chief Economist.

Prime fixed-rate loans continue to represent the largest share of foreclosures started and the biggest driver of the increase in foreclosures. 33 percent of foreclosures started in the third quarter were on prime fixed-rate and loans and those loans were 44 percent of the quarterly increase in foreclosures. The foreclosure numbers for prime fixed-rate loans will get worse because those loans represented 54 percent of the quarterly increase in loans 90 days or more past due but not yet in foreclosure, said Brinkmann.

Pay-option adjustable rate mortgages, or option ARMs, were a rising source of delinquencies and foreclosures, exceeding for the first time the rate for subprime fixed-rate loans; in contrast, both subprime fixed-rate and subprime adjustable rate loans saw decreases in foreclosures.

Pay-option ARMs were concentrated in California, Nevada, Florida and Arizona, where they were marketed heavily during the housing boom. Those four states also had 43 percent of all foreclosures started in the third quarter, down only slightly from 44 percent both last quarter and the third quarter last year. They had 37 percent of the nation’s prime fixed-rate loan foreclosure starts and 67 percent of the prime ARM foreclosure starts. As of the end of September, 25 percent of the mortgages in Florida were at least one payment past due or in foreclosure.

The foreclosure rate on FHA loans also increased, despite a large increase in the number of FHA-insured loans outstanding. The number of FHA loans outstanding has increased by about 1.1 million over the last year. This increase in the denominator depresses the delinquency and foreclosure percentages. If we assume these newly-originated loans are not the ones defaulting and remove the big denominator increase from the calculation results, the foreclosure rate would be1.76 percent rather than 1.31 percent reported.

Loan modification efforts and state laws in Illinois and Washington State among others have slowed the foreclosure process. Delinquencies increased faster than foreclosures in the third quarter. The percentage of loans on which foreclosure actions were started during the third quarter was 1.42 percent, up six basis points from last quarter and up 35 basis points from one year ago.

The percentages of loans 90 days or more past due, loans in foreclosure, and foreclosures started all set new record highs. The percentage of loans 30 days past due is still below the record set in the second quarter of 1985.

“The outlook is that delinquency rates and foreclosure rates will continue to worsen before they improve. First, it is unlikely the employment picture will get better until sometime next year and even then jobs will increase at a very slow pace. Perhaps more importantly, there is no reason to expect that when the economy begins to add more jobs, those jobs will be in areas with the biggest excess housing inventory and the highest delinquency rates. Second, the number of loans 90 days or more past due or in foreclosure is now a little over 4 million as compared with 3.9 million new and previously occupied homes currently for sale, although there is likely some overlap between the two numbers. The ultimate resolution of these seriously delinquent loans will put added pressure on the hardest hit sections of the country,” said Brinkmann.

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