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"What's Driving Mortgage Delinquencies?"

Chief Economist Frank E. Nothaft

A recent survey by the Mortgage Bankers Association (MBA) showed that nearly one in seven American households with a mortgage was delinquent at yearend, meaning they'd missed at least one payment or were in foreclosure proceedings. Moreover, the MBA's fourth quarter 2009 National Delinquency Survey reported that the percentage of seriously delinquent loans (at least 90 days past due or in foreclosure) and the number of loans in foreclosure are at the highest levels recorded in the 40-plus-year history of the survey. The non-seasonally adjusted (NSA) seriously delinquent rate for all mortgages outstanding – which is our primary delinquency metric at Freddie Mac – climbed nearly a full percentage point to 9.7 percent at the end of the fourth quarter.

Compared with the third quarter, the NSA serious delinquency rate increased for all loan types. Not surprisingly, subprime adjustable-rate mortgages had the highest delinquency rates, as these loans dominated subprime origination activity at the height of the boom and carried more high-risk features. More than 40 percent of subprime borrowers with adjustable loans were seriously delinquent at yearend – more than eight times the rate for prime borrowers with conventional fixed-rate loans.

While prime borrowers continued to have the lowest overall delinquency rates, the impact of the recession has begun to take a significant toll on these quality borrowers. The serious delinquency rates for all prime mortgages in the MBA survey increased three-quarters of a percentage point from the third quarter to 7 percent. So what's driving these delinquencies? According to our data, nearly three quarters of all delinquencies among prime borrowers are due to unemployment and the curtailment of income (58%) or excessive obligation (16%).

Hardship Reason2009
Unemployment or curtailment of income 58.3%
Excessive obligation 16.3%
Illness or death in the family 11.2%
Marital difficulties 5.0%
Inability to sell or rent property 2.8%
Employment transfer or military 1.7%
Property problem or casualty loss 0.9%
Extreme hardship 0.1%
All other reasons 3.7%

Source: Freddie Mac; data represent prime borrowers who are delinquent on conventional conforming loans owned by Freddie Mac and had successful contact with their servicer during 2009.

While the industry is facing extremely high foreclosure and delinquency rates, Freddie Mac's single-family serious delinquency rate was just under 4 percent at the end of 2009. Like the rest of the housing sector, our serious delinquency rate has deteriorated because of the market environment. It has also increased in part due to extended foreclosure deadlines and MHA trial periods that are keeping loans in delinquency status instead of moving into real estate owned (REO) inventories (lender-acquired property post foreclosure) or into permanent workouts for the borrower.

Our seriously delinquent rate is lower than the industry average for a couple of important reasons. First, Freddie Mac primarily operates in the prime, conventional conforming mortgage market – and we mostly buy 30- and 15-year fixed-rate mortgages.

In addition, Freddie Mac has been a leader in identifying and addressing delinquencies before they become foreclosures. Since 2005, we have helped more than half a million struggling borrowers avoid foreclosure. Last year alone, we were able to help more than 272,000 borrowers avoid foreclosure through our own long-standing programs and the Administration's Making Home Affordable program.

Increasing Delinquencies, Especially Subprime

Increasing Delinquencies, Especially Subprimer click to enlarge chart

There were a few bright spots in the MBA survey worth noting. First, the seasonally adjusted share of all loans entering early stages of delinquency (30- or 60-days late) at yearend marked the third consecutive quarter of decline. In the initial stages of the crisis, this rate rose rapidly as more and more homeowners began missing payments. Further, the percent of loans beginning foreclosure proceedings during the last three months of 2009 was the lowest in four quarters, and the overall inventory of loans in foreclosure proceedings increased by the smallest amount in three years, which may indicate a turning point is on the horizon.

Other signs of stabilization in the housing markets could bode well for mortgage delinquencies in the future, though we could see some increases as financial stresses continue to affect families nationwide. First, home sales have been increasing across the country for three quarters in a row, and importantly, are up significantly in some of the markets that were hardest hit by declining home values and foreclosures. Next, home prices in most indexes seem to be nearing a bottom nationally and some markets are showing improvements from the worst of the crisis. Finally, low mortgage rates, home-value declines and tax-credit incentives have meant that more homes are affordable to middle-income families and first-time buyers, helping to reduce excess inventories.

However, there are many reasons to be cautious about what could happen in coming months. Because of foreclosure moratoria, judicial backlogs and MHA trial periods, many loans are languishing either in late-stage delinquency or in the foreclosure process and could add to REO inventories in the coming year. And while the Home Affordable Modification Program will provide permanent relief for millions of families and reduce the overall number of seriously delinquent loans, not all trial or even permanent modifications will be successful in preventing borrowers from losing their homes.

At Freddie Mac we are committed to continuing to help to stabilize the housing market and curb delinquencies by doing everything we can to keep people in their homes. We're also working to ensure that people buy homes they can afford today and keep for the long-term. When we've exhausted all efforts to preserve homeownership, we make every effort to minimize the effects of foreclosures on neighborhoods – whether by renting back the property to the previous homeowner or renter or by maintaining the home in good condition while it is marketed for sale.

* Frank Nothaft left his position with Freddie Mac in January 2015


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