WASHINGTON – Delinquencies fell during the fourth quarter of 2002 nationwide, but the Mortgage Bankers Association cautions the country's overall economy will play a key role in what happens in the near future. "We expect to see delinquencies fall as the economy improves and generates job growth," Doug Duncan, MBA's senior vice president and chief economist, said during a telephone conference call with reporters on March 24. "We are seeing some signs of improvement, but absent a significant or sustained period of growth, expect no major improvement in delinquencies," said Duncan. He pointed out that the slight decline in mortgage delinquencies came at the same time personal bankruptcies were setting a new record high. In general, he said, an increase in delinquencies lags a downturn in the economy, and a decrease in delinquencies lags an improvement in the economy" The MBA report reflects just how difficult it can be to translate economic trends into their impact on the mortgage market. For example, the large number of recent home refinancings, especially in the second half of 2002, helped many homeowners achieve lower monthly mortgage payments. Presumably, that should ease the financial burden of honoring the mortgage payment schedule. However, lower interest rates also brought many first-time homebuyers into the market. Many people moved up to more expensive homes. As these loans season, there might be some increase in delinquencies. Asked by Credit Union Times about the impact of the war in Iraq on the mortgage market, Duncan responded that the effect on economic growth, interest rates and other factors will seep through to the mortgage sector. "At the present point, the major impact of the threat of war and war has been to hold interest rates down and continue very strong home purchase and refinance activity," he said. "In terms of delinquencies, the immediate question is how this affects reservists who are called up to active duty. Of course there is the Soldiers and Sailors Relief Act, which places restrictions on interest rates, foreclosure and delinquency management." According to the MBA's latest quarterly survey, the seasonally adjusted delinquency rate for mortgage loans on one-to-four unit residential properties was 4.53% at the end of the fourth quarter of 2002. This represents a drop of 13 basis points from the third quarter and a drop of 14 basis points from the fourth quarter of 2001. The drop in total delinquencies was driven by a decrease in the number of delinquent loans in all three delinquency categories surveyed by MBA – loans 30 to 59 days past due, 60 to 89 days past due, and loans past due 90 days or more. The percentage of loans in the process of foreclosure was 1.18% at the end of the 2002 fourth quarter, up from 1.15% at the end of the third quarter. The MBA report suggests this most likely indicates foreclosures, which lag unemployment and delinquencies, are peaking MBA's delinquency rate does not include loans anywhere in the process of foreclosure. The percentage of loans that entered the foreclosure process during the fourth quarter declined, dropping from 0.37% in the third quarter to 0.35% in the first quarter on a seasonally adjusted basis. Duncan noted trends in interest rates during the current quarter. The 10-year Treasury got as low as 3.57 which sparked an all-time record in mortgage application volume. Then it moved up to 4.10. "That will take some starch out of the refinance activity, depending on how many fence-sitters there were and how late they jumped. If the Treasury (rate) stays there, we would expect refinance activity to drop off again," Duncan said. However, he continued, "A 4.10 10-year Treasury probably means about a 6 percent 30-year fixed rate loan, and that's still a great interest rate. So we don't expect it to kill refinancing. But it will take out that group of people who we call the early adopters – the people who know what basis point decrease interest rates have to take before they can effectively refinance. For many of them it's 40 or 50 basis points and they jump right in. Obviously those folks are out of the game." Duncan noted mortgage lending has been so brisk that one senior lending executive joked it would be nice to raise interest rates about 60 basis points or so and leave them there for a couple months so mortgage staff could catch their breath and maybe take a day off. "There's no question the industry is running all-out," Duncan noted. "Technology has made this a market which can handle the volume, even if not as efficiently as we would like. In the early 1990s we just couldn't have done half the volume we're doing today. The systems simply wouldn't have allowed it." -

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