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Delinquency Rate Hits 3-year Low as Boom Loans Improve

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By Steve Cook

The national delinquency rate for residential home loans fell to 7.99 percent in the third quarter—the lowest reading since the fourth quarter of 2008. This represents a decline of 45 basis points from the second quarter of this year, and a drop of 114 basis points from the third quarter of last year.

The Mortgage Bankers Association reported recently that the 30-day delinquency rate reached its lowest level since the second quarter of 2007 at 3.19 percent.

Cumulative default rates among U.S. residential mortgage loans continued to level off in third-quarter 2011, furthering improvements that began at the start of the year. Loans that were originated during the height of the housing boom in 2006 and 2007 still have the highest default rates, but performance within these two vintages has improved in recent months.

“We believe moderating first default and redefault rates are propelling this reduction, and this reduction is likely the primary factor causing cumulative defaults to flatten. Performance among loans originated in 2007 has improved more than that of loans from 2006 recently, both in terms of cumulative and active defaults,” said Diane Westerback, managing director for structured finance at Standard & Poor’s. However, it’s still too soon to accurately assess whether these trends will continue, she said.

According to Michael Fratantoni, MBA’s VP of research and economics, though delinquencies are down, foreclosure starts are now rising quarter over quarter.

“While the delinquency picture changed for the better in the third quarter, the foreclosure data indicated that we are not out of the woods yet and that the issues continue to vary by geography. A closer look shows that there are different trends driving these results. The increase in the foreclosure starts rate this quarter was driven by large increases from just a few servicers, concentrated in certain ‘hardest hit’ states. For most servicers, the foreclosure starts rate was little changed over the quarter. In these ‘hardest hit’ states, the few large changes reflects the progression of delinquent loans through the foreclosure process. Outside of these states, improvement has continued, although at a slow pace due to the still-weak job market,” said Fratantoni.

The nation’s foreclosure inventory rate, which includes all loans in foreclosure, was 4.43 percent at the end of the third quarter.

That’s the same reading reported for the second quarter, and represents a 4 basis point increase from a year earlier.

“While the delinquency picture changed for the better in the third quarter, the foreclosure data indicated that we are not out of the woods yet,” said Fratantoni.

For more information, visit www.realestateeconomywatch.com.

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