Mortgage Delinquencies Flat as Foreclosures Slow

Although foreclosure data is no longer that meaningful due to banks significantly slowing their processes, looking at delinquencies can still be useful. Noting how many people are late on their payments helps us to understand housing market trends. In the first quarter, delinquencies were essentially flat -- across all stages -- according to the Mortgage Bankers Association. Is this news good, bad, or lukewarm?

First, here's a chart that shows the data (which is seasonally adjusted):

You can see that delinquencies appear to have peaked in early 2010 and fell from there. So in a sense, the first quarter's news doesn't look particularly good: in the prior three quarters, delinquencies had fallen. Why didn't last quarter fare as well?

One explanation could be that the foreclosure slowdown has also slowed the improvement in late-term delinquencies. How could that be?

Let's think about the three stages shown above. You'll notice that the early two delinquency buckets ("30 to 59" days and "61 to 89") have moved a little bit over the past few years, but it's the 90+ day bin that has seen the most change. It rose significantly, and then began to fall last year.

Did this indicate that fewer borrowers were having trouble paying their bills? To some extent, but it also reflects banks' foreclosure processing. When a loan is transferred to a stage of foreclosure, it is no longer considered delinquent. Most of those 90+ loans that disappeared moved from being delinquent to being in foreclosure.

As an analogy, think of a cup with a hole in it that's being filled with water. If the faucet is flowing faster than water escapes from the hole, the cup fills with water. But if water is escaping through the hole faster than it's flowing into the cup, then the cup will begin to drain. That's what we saw for the last three quarters of 2010: the 90+ day bin was the cup, new delinquencies came from the faucet, and foreclosures represent the water that escaped through the hole.

But last quarter, we saw the cup's contents remain level. Essentially, that means the number of borrowers who went severely delinquent must have approximately matched those that moved into foreclosure. During the period, we know that banks were slow to foreclose due to their recent troubles with processes, so this also indicates that a similar (relatively low) number of borrowers must have entered late-stage delinquency.

Recall this chart from RealtyTrac's foreclosure activity data:

You can see how low foreclosures activity was in the first quarter, relative to the quarters prior. Even though the slowdown started late last year, last quarter's foreclosures dropped by 15% compared to the final quarter of 2010.

If delinquent loans had continued to move into foreclosure as quickly as they had throughout last year, then we probably would have seen the delinquency rate continue to decline last quarter. In other words, the quarter's delinquency performance, though obviously not spectacular, is probably relatively better than it looks if you compare it to the declines seen throughout 2010. This year, delinquencies aren't declining as quickly in part because foreclosures are occurring more slowly.