|Mortgage rates down a bit, delinquencies
Mortgage rates didn't show a lot of movement this
week as the bond market waited to see what the Federal Reserve would
do when it ponders interest rates next week.
The benchmark 30-year fixed-rate mortgage fell 4 basis
points to 6.39 percent, according to the Bankrate.com national survey
of large lenders. A basis point is one-hundredth of 1 percentage
point. The mortgages in this week's survey had an average total
of 0.34 discount and origination points. One year ago, the mortgage
index was 6.15 percent; four weeks ago, it was 6.34 percent.
The 15-year fixed-rate mortgage fell 2 basis points to 6.06 percent.
The benchmark 5/1 adjustable-rate mortgage fell 3 basis points to
Fewer borrowers have chosen adjustable-rate mortgages this year,
as ARM rates climbed faster than those on fixed-rate mortgages.
Last year and the year before, about one-third of new mortgages
were ARMs. In the last few weeks it's been around 28 percent, give
or take a couple of percentage points.
The waning popularity of ARMs is good news if you worry about
people making late payments on their mortgages and losing their
homes to foreclosure. Late payments, also known as delinquencies,
are becoming more common, partly because a lot of people got ARMs
from 2003 to 2005.
3 reasons for foreclosure
"We have been expecting an uptick in delinquencies due to a
number of factors," says Doug Duncan, chief economist for the
Mortgage Bankers Association. He lists three:
- A lot of people have had their mortgages long enough to get into
trouble. Homeowners don't go delinquent on their mortgage payments
immediately after signing on the dotted line; it usually takes a
- A bigger-than-usual share of people got ARMs in the last two or
three years. The same can be said for subprime mortgages -- home
loans for people with flawed credit.
- Energy prices and interest rates have been rising, squeezing the
budgets of people who had barely been getting by.
Those second and third reasons are related. If rising interest
rates are hurting homeowners, the pain is especially acute among
ARM borrowers whose monthly payments have been going up.
No one is panicking, because the increase in mortgage delinquencies
is fairly small right now, and some of the increase is attributed
to the dislocation caused by Hurricane Katrina.
Rate of delinquency rises
Every three months, the Mortgage Bankers Association calculates
the seasonally adjusted delinquency rate -- the percentage of home
loans in which the payments are at least 30 days past due. In the
final quarter of 2005, 4.7 percent of mortgages were delinquent,
compared to a 4.38 percent delinquency rate a year before.
That's a 7.3 percent increase in late payments in a year. Pretty
hefty, and definitely something you would notice if you were collecting
mortgage payments. But when the MBA performs statistical magic to
remove the effects of Hurricane Katrina on mortgages in Louisiana
and Mississippi, the national delinquency rate is 4.55 percent in
the fourth quarter of 2005, not 4.7 percent. Still, it means delinquencies
went up 3.9 percent in a year, and they'll continue to climb.
Why will delinquencies rise, even if the economy improves? The
factors that Duncan talks about won't go away: Loans get older,
people keep their ARMs, interest rates rise.
Mortgages, like human beings, go through predictable life stages:
Sweet and sunny early years, followed by turmoil in adolescence,
succeeded by a gradual mellowing in adulthood. Mortgages hit their
troubled adolescence -- and have their highest delinquency rate
-- in years three through five.
Karma wears out, foreclosures rise
Duncan explains it this way: When a family buys a house, the buyers
have cleaned up their credit record and saved some money. The house
was inspected and repairs were made. This good karma lasts a couple
Then circumstances can change. Appliances wear out and break down.
Homeowners lose jobs, go through divorces or have babies. All of
these events are financially traumatic, especially for a family
that hasn't had time to save up. That's why delinquencies and foreclosures
peak in the third through fifth years of a mortgage: In the first
couple of years, families are still in good shape; after about five
years, they have saved money and built equity.
Half of the mortgages out there are three years old or less. Which
means that half of mortgages have yet to enter the peak years for
delinquency and foreclosure.
Delinquency rates on ARMs usually are a couple of percentage points
higher than delinquency rates on fixed-rate mortgages. That difference
almost disappeared after the refinancing boom of 2003, when millions
of people got low-rate ARMs. But delinquencies -- especially those
for ARMs -- began to march higher in the last half of 2005, two
years after the end of the refi boom.
Right on schedule.