Reprinted from the Wall Street Journal
The mortgage problems behind the havoc in financial markets climbed back last month, as delinquencies jumped at the fastest pace since last year for many loan categories.
Overall, 6.6% of mortgages were at least 30 days past due at the end of August, up from 5.8% at the end of June and 4.51% a year earlier, according to an analysis prepared for The Wall Street Journal by Applied Analytics, a unit of Lender Processing Services Inc.
“The disturbing thing is that mortgage quality is bad and getting worse,” said Mark Zandi, chief economist of Moody’s Economy.com, which has data showing a similar trend. Mr. Zandi said the latest data “argues that foreclosures will remain very, very high well into 2009 and 2010.”
The rise in bad loans is being driven by higher delinquencies for mortgages originated in 2006 and 2007, when lending standards were loosest.
Mortgage delinquencies have been on the rise for three years, which has led to losses for banks and other financial institutions that hold securities backed by mortgages. As lenders pull back from lending, those actions — along with a weak economy — are circling back and exacerbating an already-troubled market.
All loan categories were affected in the latest data, though the largest percentage-point increase came on subprime loans, where the delinquency rate jumped more than 2.2 percentage points from June and July levels to 24.48% in August.
But other types of loans deteriorated rapidly, too. Delinquencies on option adjustable-rate mortgages, which let borrowers make minimum payments that may not even cover the interest due, jumped 1.17 percentage points, to 14.38% in August. Delinquencies on Alt-A mortgages, a category between prime and subprime, also rose 1.17 percentage points, to 10.73%. In previous months, increases were smaller.
The analysis looked at the performance of 22.3 million loans originated between January 2004 and August 2008, representing about two-thirds of the mortgage market. It includes loans packaged into securities and held in bank portfolios. Loans originated before 2004 are less likely to be delinquent, largely because lending standards were tighter and borrowers are more likely to have equity in their homes.
“What happened in August is that we had the re-emergence of financial concerns and the widening of risk spreads in the market,” said Doug Duncan, chief economist for Fannie Mae. As credit worries worsened, banks tightened their standards. That made it tougher for borrowers with adjustable-rate mortgages to refinance and for homeowners in financial distress to sell their homes, which is causing some of them to fall behind. “Bank loan officers were still tightening, and it was tougher in August to get a mortgage or to refinance than in July,” said Mr. Duncan.
Job losses also are taking a toll on borrowers, said Thomas Lawler, an independent housing economist. Until recently, “so much of the horrendous credit performance has had nothing to do with the economy,” Mr. Lawler said. “Now, we clearly see the employment picture deteriorating.” Efforts to modify loans may have temporarily obscured the weakness in loan performance by reducing the number of loans reported as delinquent, he said.
Data from Equifax Inc. and Moody’s Economy.com, which is based on information from credit reports, show that delinquencies are highest in Florida, Nevada, California and Arizona. Unemployment rose in all four of those states between July and August. The unemployment rate for California rose to 7.7% in August, up from 5.5% a year earlier, according to the Bureau of Labor Statistics. In Florida, the unemployment rate climbed to 6.5% from 4.2% during the same period.
Home sales also were weak in August, according to new data compiled by Real Trends, a trade publication. Its monthly survey of large real-estate brokers, accounting for more than 35% of sales nationwide, showed that completed sales of homes in August were down 17.5% from a year earlier. That was worse than the 14% decline in July from a year before. Seasonal variations may have also played a role in the increase.
The new analysis suggests foreclosures are increasing at a slower pace or leveling off for subprime mortgages and Alt-A loans. That, said analysts, may partly reflect the widening use of foreclosure moratoriums and efforts by lenders to modify troubled mortgages.
While problems first emerged among subprime loans, a number of borrowers with good credit are now running into financial trouble. Nearly 2.4% of jumbo loans made to borrowers with good credit were at least 30 days past due at the end of August, a fourfold increase from two years ago.
The percent of loans in the foreclosure process has roughly doubled this year for option ARMs and for more traditional mortgages made to borrowers with good credit. In addition, the number of loans for which performance is getting worse continues to outpace the number for which borrowers are catching up on their payments.
A separate analysis by UBS AG that looked at loans packaged into securities concluded that delinquencies are accelerating at a “disturbing” pace for jumbo mortgages issued in 2006 and 2007 to borrowers with good credit, though they remain at relatively low levels. On Thursday, Moody’s Investors Service boosted its estimates for losses for securities backed by jumbo mortgages issued in 2006 and 2007. Jumbo mortgages are those too large to be eligible for purchase by government-sponsored mortgage companies Fannie Mae and Freddie Mac.
Both delinquencies and foreclosures continued to climb for option ARMs. The share of option ARMs in foreclosure jumped to 7.8% from 7.3% over the two-month period. Nearly 30% of option ARMs originated in 2006 were at least 30 days past due or in foreclosure 2½ years after origination.
One sign that credit tightening is having some effect: Delinquencies are lower for mortgages backed by Fannie Mae and Freddie Mac that were issued in the first quarter of 2008, compared with 2007 loans backed by the agencies at the same point in their life. Still, the early track record for the 2008 loans is worse than that for loans issued in 2005 and 2006.
“Underwriting has tightened,” said Ted Jadlos, a managing director with Applied Analytics. But the fact that delinquencies aren’t lower, given borrowers’ higher credit scores and tighter loan standards, “tells me that 2008 loans aren’t out of the woods,” he said.
