Magazine article American Banker

Delinquencies Could Rise Well into '08: MBA

Magazine article American Banker

Delinquencies Could Rise Well into '08: MBA

Article excerpt

The share of loans entering foreclosure set a record in the second quarter, and has yet to peak, the Mortgage Bankers Association said Thursday.

The national delinquency rate also rose to the highest level in six years, and it too has room to grow, the trade group said. Doug Duncan, the association's chief economist, said delinquencies and foreclosures will not peak until the fourth quarter of this year at the earliest or the second quarter of 2008 at the latest. Previously, the MBA had expected a peak sometime between this year's third quarter and the first quarter of next year.

"Realistically, the freeze-up in credit markets curtailed a lot of opportunities borrowers would have had to solve credit issues by changing product types," Mr. Duncan said in an interview Thursday. "We do not yet believe we have seen a peak, and there is some reason to believe that it will occur in the next two to four quarters."

Many of the delinquency and foreclosure rates in the second quarter were near peaks set in the last recession, he said, though the number of subprime loans is "two to three times the volume" of such loans in 2000.

For example, the delinquency rate for prime loans rose 15 basis points from the first quarter, and 44 basis points from a year earlier, to 2.73% in the second quarter - its highest level since 2001. Mr. Duncan said prime delinquency rates are being driven largely by house price declines in California and an increase in adjustable-rate mortgages in that state, where ARMs now are 40% of all loans.

In addition, the delinquency rate for subprime loans, which climbed 105 basis points in the second quarter, to 14.82%, is near its high of 14.96%, set in the second quarter of 2002.

"The drivers are different this time, in that interest rates have risen for adjustable-rate mortgages and there was weak underwriting in 2005 and 2006," Mr. …

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