The Aggregate Picture on Mortgage Delinquencies and Foreclosures

By Edward Harrison On Nov 4, 2010

Lender Processing Services releases a monthly data set which gives a better view into how the mortgage market is doing overall. I have taken a look at the most recent publication and have a few charts to share with you below on the data through September 2010.

My overall take on the data is that the first wave of problems is now behind us. I am a bit less concerned about a second wave unless housing falls apart (which the Fed is geared to prevent). If house prices do not fall precipitously, we may not have a significant second wave anytime before the next recession. The key to this will be developments in the Option ARM space where a disproportionate number of delinquencies are occurring. It seems that Option-ARM resets are triggering strategic defaults. If Option-ARM reset with homeowners significantly underwater, we could see an even larger wave of strategic defaults in the future given the large cohorts of Option-ARMS written late in the housing bubble.

Dashboard

Looking at the aggregate figures over the past year, mortgage delinquencies have fallen back even as foreclosures have risen somewhat. This does not paint a dire picture at present. It suggests future foreclosures may not be as elevated as today if the delinquency trends hold. But the data also say there is a backlog of foreclosures now working their way through the system which will keep foreclosures high.

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Delinquencies and Foreclosures by state

If I asked you which US states topped the list of mortgage delinquency and foreclosure percentages, which would you say? The answer is not 100% intuitive – you have Florida and Nevada leading the way but then come three southern states and Illinois and New Jersey. Arizona is only #10, Michigan is #12, and California #14. The states where you see the least foreclosures are largely the ones you might suspect.

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Trend in delinquencies and foreclosures

You can see fairly clearly from the charts below that the trend has turned down somewhat since the technical recovery began last spring. Unless house prices fall and an Option-ARM default wave overtakes this trend, we have passed the peak on non-current mortgages for this cycle.

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Foreclosures versus Delinquencies

On an absolute basis, the only sectors where you see an uptick in foreclosures is in the prime space. But these have a relatively low foreclosure rate. The increase in foreclosures is driven by the subprime and non-conforming segments (Alt-A and Option-ARM). Option-ARM foreclosures, while decreasing since early this year, seem to be driving the overall foreclosure levels because they are the segment with the highest percentage increase in delinquencies.

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