Mortgage delinquencies hit 10%

NEW YORK (CNNMoney.com) -- A dubious distinction was reached during the first three months of 2010: More than 10% of all mortgage borrowers are now behind on their payments.

The delinquency rate hit a record of 10.06% in the first quarter, according to the Mortgage Bankers Association. The seasonally adjusted rate accounts for all mortgages on properties that have up to four units and that are at least one payment late.

The rate has been inching steadily toward this record, having ticked up almost a full point since a year go.

The report contained a sliver of good news, however. The non-seasonally adjusted delinquency rate dropped almost one point to 9.38% between the fourth quarter 2009 and first quarter 2010.

So while the seasonally adjusted number saw growth during that period, the non-seasonally adjusted number followed the traditional pattern. Rates usually peak in the fourth quarter, as holiday spending and heating bills kick in causing people to put off paying their loan. But then, when they get caught up in the first quarter, delinquencies fall again.

"The question is whether the drop represents anything more than a normal seasonal decline or a more fundamental improvement," said Jay Brinkmann, MBA's chief economist. "The normal seasonal drop is coming right at the point where we believe delinquencies could potentially be declining and the problem for the statistical models is determining which is which."

The foreclosure inventory rate, which represents the percentage of mortgaged homes repossessed by lenders, was fairly flat quarter-over-quarter, inching up to 4.63% from 4.58%. But it jumped a lot from 12 months earlier, when the rate stood at 3.85%.

Nearly all varieties of loans suffered increased delinquencies compared with 12 months earlier. Prime fixed-rate loans hit 6.17%; prime adjustable-rate mortgages (ARMs) tipped 13.52%. Subprime fixed-rates jumped to 25.69%; and subprime ARMs are a whopping 29.09%.

The one bright spot was that delinquencies for FHA loans, the mortgages guaranteed by the Federal Housing Authority, dropped slightly to 13.15%.

The improvement is likely due to tighter FHA underwriting standards, which it adjusted after loans issued in 2007 and 2008 started souring. That should be a relief for taxpayers, who will be on the hook for any losses the FHA suffers.

Most of the overall rate increases are attributable to the seriously delinquent loans, Brinkmann said. Those loans, which are 90 days or more late, are going all the way through to foreclosure, but are not being foreclosed, keeping people in the system longer.

In the pre-housing-bust world, many borrowers would have already lost their homes and their delinquencies would no longer be counted in the survey.

Lenders have slowed repossessions for various reasons: They may not have enough staff yet to handle the volume; the foreclosure prevention initiatives, such as the Home Affordable Modification Program, is postponing many foreclosures; and the banks themselves are trying to prevent defaults by approving more short sales.

There has been a fundamental change in the nature of the loans causing the most default problems, according to Brinkmann. And, he added, unemployment is the culprit. "Delinquencies are much more driven by the recession than by any one loan type now," he said.

Subprime ARMs accounted for nearly 30% of all delinquencies a year ago, but just under 15% now. Meanwhile, prime fixed-rate loans delinquencies have grown so much that they represent the single biggest bucket of delinquent mortgages: 37% up from 29% a year ago.

Some of the prime loan defaults stem from an increase in people deliberately "walking away" from mortgages. These are homeowners who can pay their loans but choose not to because their homes have dropped so much in value.

According to a recent report, as much as 31% of all defaults in March were strategic.

Brinkmann opined that many of these "strategic defaulters" may be underestimating the impact of walking away. It may take them much longer to repair their credit histories than they realize as lenders assess more than their credit ratings to determine whether to finance future home purchases.

Underwriting involves more than just checking credit scores, and if a lender sees a strategic default on their records, homebuyers may not qualify for loans.

"They may be able to repair their credit scores," he said, "but their ability to buy a home in the future may be negatively impacted for years to come."