Earlier in March, the Mortgage Bankers Association (MBA) published the results of their quarterly survey on the health of the mortgage market. The recent numbers (for the fourth quarter 2006) generated a great deal of discussion about lending abuses and the need for regulatory reform. In this article, we’ll avoid all the debate and just delve more deeply into the facts.
The key concern in mortgage markets has been the recent upturn in both delinquency and foreclosure rates. The delinquency rate measures the percentage of loans that are past due, and the foreclosure rate measures the percentage of loans that have entered the foreclosure process during the quarter. For the mortgage market as a whole, the delinquency rate rose year-over-year from 4.70 percent to 4.95 percent, and the foreclosure rate increased from 0.42 percent to 0.54 percent. Although delinquency and foreclosure rates increased in both the prime and subprime markets, most concern centers on subprime loans. After bottoming out in 2004, delinquency and foreclosures rates for subprime loans and have been on the rise since the middle of 2005.
While delinquency rates in the subprime market have risen as of late, they are still below those of 2001-2002. However, the market share of subprime loans has grown, and subprime loans currently make up 13.7 percent of all loans, according to the MBA.
Which types of loans are contributing most to the recent rise in foreclosure and delinquency rates? To answer that question, we decompose the change in each of the rates into the fraction that is due to shifts in the share of loans across loan types over the year and the fraction that is due to changes in the rates for different loan types—prime, subprime, FHA, and VA. The decompositions reveal that subprime loans indeed are causing most of the rise in both the overall foreclosure and delinquency rates. Movement in the share of loans across the loan categories plays a less important role. (The negative contributions for the FHA and VA loans on the figure result because the share of these types of loans fell during the year.)
The recent data also reveal stronger increases in the foreclosures of adjustable-rate mortgages (ARMs) relative to fixed-rate mortgages (FRMs), in both the prime and subprime markets. However, a greater proportion of conventional mortgage loans have adjustable rates in the subprime market (over 50 percent at the end of 2006) than in the prime market (about 20 percent).