Foreclosures aren't over, despite quarterly drop in mortgage delinquency

Foreclosures may come down as the jobs market improves, but the share of home loans in serious trouble remains elevated.

Reed Saxon/AP/File
A 'bank owned' sign is seen on a home that is listed as a foreclosure on a HUD website, in Hawthorne, Calif July 21.

The good news on foreclosures: Mortgage loans went delinquent at a slower pace during the first part of this year. The bad news: The delinquency rates are still disturbingly high, so America's foreclosure wave doesn't appear likely to end any time soon.

About 9.1 percent of all mortgage loans were "seriously delinquent" in the year's second quarter, the Mortgage Bankers Association reported Thursday. That includes a roughly equal number of loans in two categories: those already in the process of foreclosure, and other loans that are at least 90 days past due.

By comparison, the seriously delinquent total stood at 9.54 percent in the first quarter, and 9.67 percent in the fourth quarter of 2009.

The problem is that the share of loans in serious trouble remains much higher than normal (it was 2.2 percent at the end of 2006), and much higher than just a year ago (8 percent). Moreover, housing economists say some of the recent improvement stems from temporary factors.

A now-ended tax credit for home buyers may have helped many homes exit the foreclosure process earlier this year, for example, as sellers arranged "short sales" to buyers who qualified for the tax credit. (A short sale is a deal in which the lender will not recoup the full mortgage balance.)

Some housing market analysts express hope that the peak of serious delinquency is now in the rear-view mirror. But they say it cautiously.

"It's more of a hope than anything at this point," says Jay Brinkmann, chief economist for the Mortgage Bankers Association. "It's largely going to be dependent on what happens with the jobs market."

An improving jobs picture is vital to boosting the number of people who have the income and confidence to become home buyers. Two related factors also have an important role in the pace of foreclosures: the stability of home prices, and the ability of banks and at-risk borrowers to work out sustainable loan modifications.

The more home prices fall, the more borrowers go into a negative equity position (with loan balances greater than the value of their home), making default more likely. Loan modifications, meanwhile, can help struggling borrowers avoid default. But many of the modifications don't make deep cuts in the balance due. Perhaps as a result, a high percentage of the modified loans have been going back into default.

That high rate of re-default, coupled with still-high unemployment numbers, appears to be causing a high number of loans to enter the pipeline that may ultimately lead to foreclosure, Mr. Brinkmann said in releasing the numbers Thursday.

"The disappointing news is that, after declining since the beginning of 2009, the rate of short-term delinquencies is going up, and the increase in these short-term delinquencies may ultimately drive the foreclosure measures back up," he said.

Short-term delinquencies include people who are just a month or so behind on payments.

Another survey released Thursday, by the data firm CoreLogic, estimates that 4.8 million borrowers have severe negative equity, with loan balances that are at least 25 percent larger than their home's current value. This rate is declining as more homes go through the foreclosure process, but that high number suggests that defaults will remain elevated for an extended period, according to CoreLogic chief economist Mark Fleming. (For context, the nation's total number of mortgages is about 50 million.)

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