According to a report by the Mortgage Bankers’ Association (MBA) the delinquency rate for first-lien mortgage loans on 1-4 unit residential properties decreased to a seasonally adjusted rate of 5.54% of all loans outstanding at the end of the first quarter of 2015, 14 basis points less than its level in the fourth quarter of 2014 and 57 basis points below its level one year ago. The serious delinquency rate has now reached its lowest level since the second quarter of 2007.
The 4-quarter decline in the share of mortgages past due, measured on a not seasonally adjusted basis, reflected a decline across each stage of delinquency. On a not seasonally adjusted basis, the percentage of all loans past due fell by 55 basis points over the quarter. Loans 30-59 days past due fell by 12 basis points, loans 60-89 days past due fell by 6 basis points, and loans 90 or more days past due decreased by 37 basis points. However, the foreclosure starts rate remained unchanged over the past four quarters.
Although the foreclosure starts rate remained unchanged over the past four quarters, over the past 4 years, 2011-2014, it has been steadily declining and nearing a recovery. During the period including 2002 to 2005, the foreclosure starts rate remained low and relatively steady, however, it began a sustained climb beginning in 2006, peaking at 1.27% in 2010. Since peaking in 2010, the foreclosure starts rate of mortgages secured by 1-4 unit family homes has been falling. By 2014, the foreclosure starts rate reached 0.46%, in line with the level recorded in both 2003 and 2004.
Statistics from the Federal Deposit Insurance Corporation (FDIC) suggest that, because of their size, defaults of first-lien mortgages on 1-4 unit homes had a larger impact on the foreclosure starts rate, but the default rate on junior lien mortgages was much more severe. Liens on property represent the parties, usually financial institutions, that have a claim on the property in the event of default. Each of these parties will attempt to recover the money that they are owed if the borrower defaults. However, liens come in an order of priority. If a default occurred, the first lien holder, is the person or, typically, the financial institution, that has priority over all other claims. Junior liens are parties that have claims on the property after the debt owed to the first lien has been paid. For example, a second loan used to cover the difference between the first mortgage and the value of the home, such as a “piggy-back mortgage”, is typically placed in a junior position to the first, or primary, mortgage. If a default occurred when the homeowner is considered “underwater”, that is the value of the home was less than the total amount borrowed, then the first lien holder, relative to the junior lien holders, is more likely to recover the amount that they lent.
As Figure 2 illustrates, the default rate on first-lien mortgages varied between 0.0% and 0.1% between 2002 and 2006, but beginning in 2007, the default rate on first-lien mortgages began to rise and by 2009, the default rate peaked at 1.4%. Since 2009, the default rate on first-lien mortgages that were used to secure 1-4 unit homes has steadily declined and is now at 0.2% as of the fourth quarter of 2014.
Over the years including 2002 to 2006, the default rate on junior lien mortgages was higher than first-lien mortgages and slightly more volatile, but still relatively low. Similar to the experience of first-lien mortgages, the default rate on junior lien mortgages began to rise in 2006, soaring to 6.0% by 2009. As recently as 2012, the default rate of junior lien mortgages on 1-4 unit homes was 5.0%. By 2014, the default rate of junior lien mortgages had declined to 1.1%. However, the default rate in 2014 remains above any level recorded between 2002 and 2006.