Low Mortgage Rates Pushing Down Delinquencies

Late and missed mortgage payments are not fun for anyone, and now there is great news that mortgage delinquencies have taken a sharp downward turn.

Hardest Hit Areas Improve Most

The latest data from TransUnion, one of the three big credit reporting agencies, shows that delinquencies in the third quarter were 26 percent lower than a year ago. Every single state and the District of Columbia improved. Arizona and California showed the greatest positive change, both posting slightly better than 30 percent declines in their mortgage delinquency rates. Florida improved by 26.8 percent and Nevada by 28.7 percent.

"This marks the third quarter in a row where we have posted all-time highs in terms of delinquency improvement and that is very welcome news for both borrowers and their lenders," said Tim Martin group vice president of U.S. Housing in TransUnion's financial services business unit. "Many of the delinquent mortgages we have been tracking have been delinquent for a very long time, so it is encouraging to see this number is coming down so significantly."

Leading or Lagging?

You can see changes in delinquency rates in two ways. First, they're a leading indicator telling us where foreclosure levels are headed. Under new federal rules, mortgage services cannot foreclose unless a mortgage is at least 120 days late. If the delinquency rate is falling it means fewer people will pass the 120-day threshold and therefore there will be fewer foreclosures down the road.

Second, you can also see delinquencies as a lagging indicator, something which tells us where the economy has been during the past few months. Rising delinquency rates mean borrowers are having tougher times, something can impact both mortgage re-payment levels and ultimately home values.

It's not surprising that delinquency rates are falling. The requirements under Wall Street limit the ability of lenders to make high-risk mortgages, As a result for the past three years a number of risky loan products -- think of option ARMs and loans with no documentation -- have been virtually impossible to find, much to the good of borrowers, lenders and investors. The pay-off is a mortgage marketplace with less risk and fewer foreclosures.

Low Mortgage Rates

No less important, mortgage rates remain low by historic standards -- very low. Standard & Poors says that in early summer "the 30-year mortgage rate is well below the 6.1% average between 2002 and 2007 and the over 40-year historic average of 8.6%."

While a less-risky mortgage environment and lower rates are significant, it's not enough to assure minimal levels of delinquencies and foreclosures. Household incomes also have to be strong, but the reality is that wages have been falling for some time. According to the Census Bureau, the median household income in 2011 was $50,054 -- that's 8.9 percent less than in 1999.

If you want to see low delinquency rates, watch what happens if we can get household incomes back on the right track.

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