Mortgage Delinquency Lowest in Eight Years, Foreclosure Inventory at Record Low

Americans are doing the best job in eight years paying their mortgages, according to the Mortgage Bankers Association.

The U.S. mortgage delinquency rate fell to an eight-year low in the second quarter of 2015. Strengthening job markets and rising home prices helped borrowers, who were struggling, to sell property.

The mortgage delinquency rate, which include loans that are past due but not in the foreclosure process, fell 24 basis point to 5.3%, after adjusting for seasonality, to its lowest point since the second quarter of 2007. Although the unemployment rate was unchanged in July, overall the economy is still creating jobs at a steady rate, which supports mortgage borrowers. House prices have recently increased by over 5% year-over-year, which should lead to a further fall in the number of mortgages that are underwater.

Marina Walsh, MBA’s Vice President of Industry Analysis said, “Overall, delinquency rates and the percentage of loans in foreclosure continued to fall in the second quarter and are at their lowest levels since 2007. Even more telling, nearly every state in the nation reported declining foreclosure inventory rates over the second quarter, reflecting a nationwide housing market recovery and strong job market that provide opportunities for distressed loans to be resolved rather than be put into foreclosure.”

What to Expect?

The downward trend in mortgage delinquencies should continue as unemployment continues to decline. Mortgage rates typically just increase gradually, and average home prices continue to remain high. Also, we expect an increase in lenders’ willingness to extend mortgage credit, which will further boost housing market activities.

Newer loans are benefiting from rising property prices, tighter underwriting requirements and the lowest jobless rate in seven years, while mortgages originated before the real estate bust are still moving through foreclosure. The share of loans in the foreclosure process at the end of the second quarter was down 13 basis points from the previous quarter to 2.09%, the lowest since the fourth quarter of 2007.

The foreclosure starts rate was merely 0.4% in the second quarter, 0.05% lower than the first quarter, and on par with the rate seen during the housing boom in the 2Q14. The 3.95% of mortgages that were seriously delinquent (at least 90 days past due) is also the lowest since 2007. This represents a decrease of 29 and 85 basis points from the previous quarter and the second quarter of 2014, respectively.

Is Nonjudicial Foreclosure a Better Way Out?

States that deploy a judicial foreclosure process, which includes typical foreclosures done through the court system, had a higher foreclosure inventory rate than nonjudicial states. Overall, 3.41% of loans in judicial states are in the foreclosure process, compared with 1.15% of loans in nonjudicial states.

Judicial states tend to give more protection and time to delinquent borrowers at the expense of a swift process. New Jersey maintained the highest percent of loans in foreclosure, at 7.31%, followed by New York at 5.31% and Florida at 4.24%. In the meantime, Colorado, North Dakota and Wyoming had foreclosure inventory rates of below 0.7%. In Ohio, 2.43% of loans were in foreclosure, down from 2.88% a year ago. California, another boom-bust state, but one with a nonjudicial foreclosure process, had an inventory of 0.91%.

Meanwhile, applications for new home purchases dropped 4% in July, compared to the prior month, partially driven by a rise in mortgage rates.