Squishy foreclosure data

Overcounting may magnify the problem.

Posted: July 01, 2007

Although most observers of today's housing market believe that the foreclosure rate is rising nationwide, some are suggesting that the data underlying that belief might be just a little bit squishy.

"It is simply the way in which foreclosure numbers are tracked," said Mark Fleming, chief economist at First American CoreLogic in Sacramento, Calif., which develops automated home-valuation models for lenders throughout the country.

"Most of the techniques that are used to track foreclosures are based on aggregating information from the public record," Fleming said. "When foreclosures occur, there are pieces of paper filed at the courthouse, and how we count those pieces of paper is the way these numbers are calculated."

Multiple pieces of paper representing the same foreclosure may be filed, he said, so the number of total foreclosures can end up inflated.

According to Holden Lewis of Bankrate.com, "A mortgage is said to be delinquent when you are 30 days past due. It is a temporary state that ends when you catch up with your payments or lose the house."

(A borrower is in default if he or she has not made monthly payments over a period, sometimes three or six months, specified in the loan papers signed at closing.)

But because of the variety of ways that the data are measured and surveyed, there is a chance "that the number can be spun," Lewis said.

Both the Mortgage Bankers Association of America and First American CoreLogic periodically track loan performance to determine "what is going on beneath the surface of mortgage-backed securities," Fleming said. The mortgage bankers' group surveys lenders, while First American tracks monthly performance of 20 million loans to measure delinquency rates and foreclosure rates.

Recent national numbers compiled by First American show that 14 percent of all subprime loans (made to borrowers with less than good credit) are in a 60-day delinquency.

"The best it has been is 7 percent, and that was in early to mid-2005," Fleming said. "The subprime category always has a relatively high delinquency rate. The last peak was 11 to 12 percent in late 2001."

A first-quarter survey by the Mortgage Bankers Association showed the delinquency rate at 4.84 percent of all outstanding loans, down 0.11 percentage points from the fourth quarter of 2006 and up 0.43 percentage points from the first quarter of 2006.

The share of loans in foreclosure was 1.28 percent of all loans outstanding at the end of the first quarter, an increase of 0.09 percentage points from the fourth quarter of 2006 and 0.30 percentage points over a year ago, the association reported.

Traditionally, fixed-rate prime mortgages have the lowest delinquency rates; prime and subprime adjustable-rate mortgages tend to have higher delinquency rates because of their changing terms.

Douglas Duncan, chief economist for the association, said the delinquency rate is being driven by seven states.

"The percentage of loans in foreclosure would be well below the average of the last 10 years were it not for Ohio, Michigan and Indiana," Duncan said. "The rate of foreclosures started nationwide would have fallen were it not for the big jumps in California, Florida, Nevada and Arizona."

Fleming noted that California's delinquency rates are higher than they were a year ago but lower than Michigan's because California houses appreciated in price.

"What happens when you can't pay your loan but are sitting on 30 percent equity?" Fleming asked. "As long as there's equity, the 'sell or refinance options' are there."

Delinquency rates in Pennsylvania and New Jersey were down at the end of the first quarter from the end of the fourth quarter of 2006, the mortgage bankers' group reported.

When meeting the mortgage payments is a problem, whom should a homeowner call?

The typical advice is to contact the mortgage servicer if you anticipate trouble, Holden Lewis said, but the usual response is "not to call again until [you're] 30 days' past due."

Michelle Lewis of Northwest Counseling Service in Philadelphia said that, by the time delinquent low- and moderate-income borrowers reach her office, "they are so overcome by anxiety that they can't even open the mail, so they come to us with a bag full of unopened mail."

Because her agency has a high percentage of conventional borrowers (with prime loans rather than subprime), she said, it has been able to keep the vast majority of those who seek help in their houses. The agency negotiates with servicers, and with homeowners to work on getting them to manage their finances better.

"Sometimes, we go to the servicer to beg, or we go past the servicer to the investor," she said. "We also are able to talk with the homeowners before the servicers are willing to."

The reason why mortgage servicers may seem unwilling to talk with borrowers before they become delinquent is securitization, said Bill Rinehart, vice president and chief risk officer of Ocwen Corp., one of the nation's largest subprime-mortgage servicers. "The owner of the typical home loan these days is this faceless investor," he said.

Mortgages are packaged by investors for purchase on the secondary-mortgage market. When the loans are sold, so are servicing rights. The servicer sends out bills, processes payments, and handles escrows, Rinehart said.

Under federal law, how each loan is serviced is spelled out in what is called a "pooling and servicing agreement," or PSA. For example, if a borrower is behind in his payments, the PSA may require that the servicer call the borrower every couple of days as a reminder. Most, however, spell out only what should be done if a customer is in default, Rinehart said - although PSAs written today allow servicers to get involved before delinquencies threaten.

"The problem for the mortgage industry is that the delinquency and foreclosure rates are higher than we thought we'd see," Fleming said. The subprime category "is 16 percent of the entire marketplace, so that means the delinquency rate is about 2.25 percent of outstanding loans.

"It is a problem the industry needs to solve quickly."

Mortgage Delinquency Rates

For the first quarter of each year,

in percentage of total loans in

the United States.

Year   All Loans   Prime   Subprime   

2002   5.14   2.69   14.74   

2003   4.85   2.62   13.04   

2004   4.46   2.26   11.66   

2005   4.31   2.17   10.62   

2006   4.41   2.25   11.50   

2007   4.84   2.58   13.77   

SOURCE: Mortgage Bankers Association of America

Mortgage Delinquencies in the Region

For the period January through March 2007.

   Number of   Percent   Days Past Due    

   Mortgages   of Total   30   60    90+   

All Mortgages

N.J.   1,238,800   3.75   2.35   0.66   0.74    

Penna.   1,481,614   4.85   2.83   0.89   1.17    

U.S.    43,895,066   4.33   2.58   0.80   0.95    

Prime ARMs

N.J.    166,371   3.77   2.48   0.72   0.58    

Penna.    102,975   4.12   2.52   0.79   0.82    

U.S.   6,079,823   3.40   2.17   0.66   0.57    

Subprime ARMs

N.J.   65,374   14.07   7.39   3.10   3.59    

Penna.   75,654   16.45   8.30   3.43   4.71    

U.S.   2,901,511   13.87   7.13   3.07   3.67    

SOURCE: Mortgage Bankers Association of America

Contact real estate writer Alan J. Heavens at 215-854-2472 or aheavens@phillynews.com.

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