Further Increases in Delinquency and Foreclosure Rates Expected

The recent increase in mortgage delinquency rates in the United States will peak by year's end, according to a study released by the Mortgage Bankers Association (MBA) titled “The Residential Mortgage Market and Its Economic Context in 2007.” But, even with the report suggesting the housing market will “regain its footing by mid-2007,” researchers who composed the study anticipate further increases in delinquency and foreclosure rates in the quarters ahead.

According to MBA's latest report, during the third quarter of 2006, delinquency rates increased for all loan types – with the largest delinquency rate increases occurring in the subprime adjustable rate mortgage (ARMs) lending market. The report says the delinquency rates on subprime ARM loans rose 86 basis points between the second and third quarters of 2006, compared to a modest 15 basis point increase that was felt in the prime loan market.

Despite many of the pressures coming from the subprime lending market in 2006, the MBA report predicts delinquency rates will peak at lower levels in 2007 when compared to peaks experienced in past years.

“The study provides relevant context and perspective on the current state of the economy and its implications for the housing and mortgage markets,” said Doug Duncan, MBA's chief economist and senior vice president of research and development. “In order to understand the developments with respect to trends in mortgage product choice and mortgage delinquency and foreclosure rates, one needs to understand the underlying economic trends.”

Some of the more notable 2007 trends predicted in the study include:

• The U.S. Economy will continue to grow in 2007, but at a slightly below trend rate of growth.


• The housing market will regain its footing by mid-to-late 2007, depending on what measure is used. Home sales and starts will likely begin to increase in mid-2007, but, given the large inventory overhang, prices are unlikely to show any significant increase until late 2007 or early 2008.


• The residential finance market is fundamentally sound and working efficiently. The housing market will continue to benefit from relative low long-term interest rates. For ARM borrowers, the study expects short-term interest rates to be steady going forward.


• Barring any unexpected downturn in the economy, the recent increase in mortgage delinquency rates will likely peak by the end of 2007, but at levels well below those of past peaks. This lower peak will come despite the change in composition on outstanding loans, namely a larger proportion of subprime loans in recent years.

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