Dec142011

Mortgage delinquencies expected to rise into 2012

Mortgage delinquency rates will likely decline in 2012 as lenders foreclose and remove the loan from the delinquency pool. Unfortunately for lenders, the delinquency rate is expected to rise for the first quarter of 2012 as declining prices and a weak economy prompts more borrowers to strategically default.delinquencies

2012 mortgage delinquencies seen dropping sharply

By Eileen Aj Connelly

NEW YORK – If the U.S. economy does not suffer more setbacks, the rate of mortgage holders behind on their payments should decline significantly by the end of next year, according to credit reporting agency TransUnion.

Mortgage delinquency rates — the ratio of borrowers 60 or more days behind on their payments — will likely tick up to about 6% through the first three months of 2012, TransUnion said in its annual delinquency forecast issued Wednesday.

Did you notice I used a different headline than the reporter? Which is the bigger news story, the rise in delinquencies caused by the weak economy, or the projected decline later in the year?

In my opinion, the fact that delinquencies are increasing is the bigger story. This reverses the trend of the last couple of years, and the forecast for a late year decline may or may not come to pass. What if the economy remains weak? Or what if the ongoing decline in prices induces more borrowers to strategically default? End late year drop which is the subject of the reporter’s headline is by no means certain.

But by the end of next year, it could drop to 5%, TransUnion said. That’s well off the peak of 6.89% seen in the fourth quarter of 2009.

Chicago-based TransUnion’s forecast takes into consideration several factors, including expectations that consumer confidence and the economy will improve next year.

This is a very important assumption, and it could easily be wrong. If consumer confidence does not increase, strategic default will become an even greater problem. Borrowers who are watching prices fall and who don’t believe either house prices or the economy will be improving soon are far more likely to walk away, particularly for borrowers who are already underwater and paying more than a comparable rental.

Also, banks are expected to get a good portion of pending foreclosures off their books next year, said Charlie Wise, TransUnion director of research and consulting. …

Economic uncertainty has also contributed. In the third quarter of 2011, mortgage delinquencies saw their first uptick in six quarters, largely fueled by concerns over the economy as lawmakers were debating the U.S. debt ceiling and Europe’s debt crisis was unfolding.

This reporter does not know what he is talking about. Does he really think some borrower somewhere decided to quit paying their mortgage because of the European debt crisis? Macro issues do not prompt micro decisions.

Helping to cut the mortgage delinquency rate are a slowly improving job market and a stabilizing housing market.

The declining delinquency rate is actually a result of foreclosures wiping out non-performing mortgages, and the better loans being underwritten as lenders return to sane lending practices.

While the drop will be significant, the rate will remain well above the pre-recession average of 1.5% to 2%.

“We have a long way to go to get back,” said Steven Chaouki, a TransUnion vice president. …

Chaouki said the conventional wisdom before the Great Recession was that homeowners would put their mortgages first because of concern about their reputation and the emotional attachment involved in owning a home. But what has become clear as housing prices have continued to fall, he said, is that bill payment is far more practical.

“People were protecting their home equity,” he said. Credit cards were relatively easy to come by in years past, he said, so when money got tight, it was an easy decision to default on cards and maintain house payments. Now it’s common to owe more on a mortgage than a house is actually worth, but credit cards are harder to get. So consumers are being practical and protecting what is more valuable to them.

He said he expects the equation will shift again if housing prices rebound and people go back to building home equity.

Don’t expect the situation to change any time soon as most loan owners are years away from having any equity.

Delinquencies will likely decline in 2012, but not because borrowers will become current on delinquent mortgages. Increasing foreclosures will largely be responsible for any decline in delinquency rates. Expect foreclosure rates to increase in 2012.