Is the mortgage market starting to heal?

NEW YORK (CNNMoney.com) -- The mortgage market may have begun to turn: Fewer borrowers fell behind on their payments during the last three months of 2009.

A seasonally adjusted 9.47% of all mortgage loans were late during the fourth quarter, down from 9.64% at the end of September, according to the National Delinquency Survey, which is produced by the Mortgage Bankers Association and is considered the bible of the industry.

This figure is significant because it shows a reduction -- even if just slight -- in the volume of loans heading toward the foreclosure process. This has not happened since 2006.

"We are likely seeing the beginning of the end of the unprecedented wave of mortgage delinquencies and foreclosures that started with the subprime defaults in early 2007, continued with the meltdown of the California and Florida housing markets due to overbuilding and the weak loan underwriting that supported that overbuilding, and culminated with a recession that saw 8.5 million people lose their jobs," said Jay Brinkmann, the MBA's chief economist.

Of course, delinquency rates were still 1.59% higher than they were in the last quarter of 2008.

Brinkmann's main reason for optimism was a drop in the percentage of borrowers who had missed one mortgage payment. That rate fell quarter-over-quarter to 3.63% from 3.79%.

"The continued and sizable drop in the 30-day delinquency rate is a concrete sign that the end may be in sight," he said. "We normally see a large spike in short-term mortgage delinquencies at the end of the year due to heating bills, Christmas expenditures and other seasonal factors."

Another positive sign is a drop in the percentage of borrowers whose lenders had initiated foreclosures, the first step in the process of taking homes away from borrowers. That may be only temporary, though: Lenders have been holding back and the number of seriously delinquent loans not in foreclosure has ballooned.

As a result, loans 90-days late or more now account for half of all delinquencies calculated by the MBA, a record high and twice the category's share of delinquencies two years ago.

"The build-up in the 90-day bucket of loans that could end up in foreclosure should keep foreclosure rates elevated," said Brinkmann.

But the high number of borrowers in that category is also somewhat of a statistical glitch. Loans are remaining there much longer than they did in past years because of government and lender attempts at mortgage modifications.

Of all the delinquency hot spots, Florida is the worst hit with 26% of all mortgages in some kind of trouble.

The worst performing category of loans was subprime adjustable rate mortgages, with more than 42% being 90 days late or in foreclosure. That is nearly four times the rate of default during early 2007, when the mortgage meltdown was heating up.

The MBA report, according to Mike Larson, a real estate analyst for Weiss Research, is a further sign that the housing market is truly stabilizing.

"We're now seeing the next piece of the puzzle fall into place," he said. "Specifically, early stage delinquencies are stabilizing. This is a key sign that housing market conditions are slowly, grudgingly, getting slightly better."

One key trend is that home price declines, a key influence on delinquency rates and, especially, on foreclosures, halted their free-fall in 2009. The average home price in 20 major markets dropped only about 5% during the 12 months ended Nov. 30, according to the S&P/Case-Shiller home price index.

As prices stabilize, fewer mortgage borrowers will plunge underwater, owing more on their mortgage balances than their homes are worth. Homeowners with positive equity in their homes have an asset they can tap during temporary financial strains and are much less likely to fall behind on their mortgages.