Rising Delinquencies and Foreclosures
on Home Mortgages

The Mortgage Bankers Association has released a report showing that during the second quarter of this year, the percentage of homeowners who were late on their mortgage payments has been rising. The overall seasonally adjusted delinquency rate for conventional loans on one-to-four unit residential properties rose from 4.65 percent in the first quarter of 2002 to 4.77 percent in the second quarter. More detailed information is provided in the table below. Over the same period, the portion of loans in process of foreclosure rose from 1.10 percent to 1.23 percent.

Source: Mortgage Bankers Association

Doug Duncan, Chief Economist of the MBA, attributed most of the increase to the growth in the level of unemployment, which rose from 5.6 percent in the first quarter of this year to 5.9 percent in the second quarter. (In the second quarter of last year, the unemployment rate was only 4.5 percent.) In the second quarter of this year the seasonally adjusted delinquency rates on conventional loans were 3.10 percent, 11.81 percent for FHA loans and 8.00 percent for VA loans.

Another matter of concern to mortgage lenders and regulators is the "duration gap"-a measure of lenders' exposure to the interest-rate risk. The risk is that, if interest rates should rise, the value of lenders' mortgage portfolios would decline, and the costs of new borrowings would rise. If the duration of both assets and liabilities is the same, the market value of lenders should be unchanged, other things being equal. According to Dawn Kopecki in her article in the Wall Street Journal, concern about Fannie Mae's risk exposure arose when its monthly financial disclosure report revealed "that its so-called duration gap, which measures its success in matching [the maturities] of its assets and liabilities swung from negative nine months in July to negative 14 months in August, due to low interest rates and heavy refinancing activities." Its preferred range is plus or minus seven months. In response to this information, the Office of Federal Housing Enterprise Oversight is requiring frequent reports from Fannie Mae concerning its duration gap. Fannie Mae's portfolio of mortgage loans amounts to $747 billion.

In her article in Business Week, Marcia Vickers notes other factors that are also contributing to worries in the residential mortgage market. Cash-out refinancing by traditional lenders has its share of the blame. These loans permit the homeowner to obtain a loan for the full value of the property. And, there is the 125 percent loan product that covers both the cost of the home and the moving charges as well. Stir into this mix the adjustable-rate mortgage loans (ARMs) that initially have rates below those on fixed-rate mortgage loans, but will later rise if general interest rates increase. Over the past year, the percentage of such mortgage loans granted has doubled from 10 percent to 20 percent. Thus, many homes are mortgaged "to the hilt" with ARMs. If mortgage rates should rise in the next several years, homeowners with 125 percent loans and ARMs will be confronted with what economists term "a double whammy."