In a press release and subsequent press conference Thursday, the Mortgage Bankers Association (MBA) cited fourth quarter 2004 figures in reporting a decline in the rate of delinquent payments on and pending foreclosures of residential mortgages since both the third quarter of 2004 and the end of 2003.

MBA's 132nd quarterly survey (dating back to1970) covers 38.7 million first mortgages on one-to-four unit residential properties. The survey base itself has increased dramatically, now reviewing the status of 500,000 more loans than in the previous 2004 report and 1.5 million more than in the year-end 2003 survey. It now covers over 80 percent of the approximately 48 million mortgage loans outstanding in this country, and includes more than half of the non-prime mortgage market.

MBA collects information by loan type (prime, sub-prime, fixed rate (FRM) and adjustable (ARM) mortgages,) and by guarantor, (Federal Housing Administration (FHA) and Veterans Administration (VA.)) Fannie and Freddie are included in the prime figures. In other words, the survey is a pretty comprehensive picture of what is going on out there.

Since the fourth quarter of 2003, delinquency rates (gathered in 30 day, 60 day, and 90 day plus "buckets) fell for all loans types. Prime loans were down from 2.37 percent to 2.22 percent and sub-prime loans from 11.53 percent to 9.88 percent. FHA loans were down two basis points to 12.21 percent, and VA loans dropped 103 basis points to 6.96 percent.

Prime loans decreased both in the last quarter and the last year: fixed rates down 11 basis points since the third quarter and dropping from 2.11 percent to 2.04 percent, seasonally adjusted since 2003. ARMS were down 70 basis points to 2.11 percent for the year; 12 basis points on a quarterly basis.

The real story, however, is the delinquency rates for sub-prime loans. FMAs in this category were down 143 basis points (to 9.07) and ARMS a dramatic 338 basis points (to 9.52 percent) on an annual basis. Quarterly figures are -60 and -70 basis points respectively. MBA offered no specific explanation for these sub-prime drops.

State laws regarding foreclosures differ, and so does the time-line for pending foreclosures which can take two or three year to resolve in states utilizing a "judicial foreclosure process," Nonetheless, the "foreclosure inventory," those homes that are in active foreclosure, has decreased slightly (6 basis points to 0.49 percent) for prime loans and a rather dramatic 165 basis points for sub-prime.

Actual foreclosures also decreased for sub-prime loans. They were down 2.10 percent to 1.37 percent. Prime loan and VA foreclosures remained virtually unchanged (0.20 percent and 0.48 percent respectively.)

Bucking the trend, however, were foreclosures of FHA loans. In the fourth quarter of 2004 these set a record high rate of 0.91 percent, a steep increase of 14 basis points since 2003.

And, since last quarter, the seasonally adjusted percentage of new foreclosures (those just moving from delinquent into the foreclosure inventory category) increased 2 basis points for prime loans, 11 basis points for sub-prime, and 7 basis points for FHA loans while decreasing .03 percent for VA guaranteed loans.

In a telephone press conference following the noon release of data, Doug Duncan, MBA's chief economist and senior vice president commented on the figures and made a few projections for the future.

Mr. Duncan cited the 4 percent growth in the U.S. economy during the fourth quarter of 2004, the addition of 190,000 new jobs, and continued low interest rates as major contributors to the improved delinquency rate. On-time mortgage payments, he noted, constitute 96 percent of all payments. He predicted that slow but steady economic growth and a commensurate increase in jobs would likely mean continued declines in delinquencies for the next few quarters.

However, Mr. Duncan cited the need to monitor the many "young" portfolios. The rash of new home purchases and refinances, particularly of the cash-out variety, and the continued popularity of ARMs, may present problems in the future. Historically, new loans perform well, but as they age more problems arise. The very young loans that are out there in large numbers may prove vulnerable to problems down the line. Cash-out loans were down .03 percent in the fourth quarter (to 56% of all refinances, but still well above the 44% seen in 2003), and ARMs continue to represent about a third of the mortgage market. ARMs may present a risk if rising rates cause uncomfortable increases in monthly payments once the initial loan period ends and rates adjust.

In response to questions, Mr. Duncan said that the spike in FHA foreclosures is probably a result of declining "good credit" in the FHA loan base. Private markets are producing new products that have eroded FHA market share, computerized underwriting has moved some households out of the FHA customer base into sub-prime or even prime markets, and rapid appreciation of house values has allowed many FHA customers to refinance into conventional loan products. Processing of FHA loans is also more expensive, leading lenders to steer away from FHA loans where other options are available. The result, he said, is a weaker or higher risk portfolio. This, he continued, is a problem that must be dealt with and a task force is now studying the problem.

High real estate appreciation areas such as California have been to an extent, immunized against delinquencies and foreclosures, presenting homeowners with a ready market if they must bail out of mortgages because of financial difficulties. As home value escalation slows, regulators should be watching these high cost areas, alert to patterns in the composition of new loans and any weakness in underwriting

The next MBA survey will be released in mid June.