Mortgage rates down a bit, delinquencies up
By Holden Lewis • Bankrate.com

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 6.04 percent.

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 few years.
• 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 of years.

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.