Mortgage Delinquencies Down,
Perhaps Temporarily?

Data for the fourth quarter of 2001 released by the Mortgage Bankers Association (MBA) revealed that 30+ day delinquency rates on residential mortgage loans were down from the third quarter, but foreclosures were up. The proportion of 1-4 family unit residential mortgage loans delinquent 30 days or more was 4.65 percent (see Figure 1). The decline was largely unanticipated, given the upward trend in delinquencies for all types of consumer debt over the past 12 months and the deteriorating economic conditions prevailing through 2001.

Optimists like Douglas Duncan, MBA's chief economist, noted that falling delinquencies can indicate that the economy is strengthening, and could be a sign of fewer foreclosures and bankruptcies ahead. But, other analysts, such as Mark Zandi, chief economist with Economy.com attributed the drop in mortgage delinquencies to the huge volume of refinances during 2001 (see Figure 2). About $1 trillion of residential mortgages were refinanced last year. While refinancing normally comprises 15-20% of mortgage originations, in the fourth quarter of 2001, the share of originations attributable to refinancing spiked to 70%. Zandi told the American Banker, "the drop in delinquencies revealed nothing about the economy but reflected the unprecedented refinance activity in the fourth quarter, which bailed out a lot of distressed borrowers." While the drop in delinquencies was certainly welcomed, Zandi expects higher foreclosures and delinquencies through at least the first half of 2002. The observed simultaneous rise in foreclosures and decline in delinquencies during the fourth quarter is consistent with Zandi's view. For a borrower with mild delinquency, refinancing a mortgage can bring them current. This is less likely to be an option for the seriously delinquent borrower facing foreclosure.

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