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Mortgage Delinquencies Point To Trouble Ahead

July 7th, 2010 Michael McDonough

Many investors hoped a modest decline and a leveling off in mortgage delinquencies the end of last year signaled a top for the index, but those hopes were dashed when delinquencies for all types of mortgage hit a new high during the first quarter.   Fears were further exacerbated yesterday when Lender Processing Services released their ‘Mortgage Monitor’ for May, which showed a 2.3% increase in total delinquencies, indicating the first quarter’s sharp rise may not have been a one off event.  Even more worrisome is the fact the according to LPS the amount of mortgages delinquent by 0 to 30 days rose 10% after showing some improvement during the first quarter.  According to the Mortgage Bankers Association (MBA) the national delinquency rate presently stands at 10.1%.  The rate for prime mortgages is 7.3%, and for subprime 27.2%, all of which rose during the first quarter.  Rising delinquency rates—likely due to significant under employment—means foreclosures will be a lingering issue well into the future.

Source: MBA

As an aside, it has been suggested that up to 31% of total foreclosures are actually strategic defaults, where buyers are underwater on their mortgages and essentially give up their homes to their lenders rather than paying off the mortgage now valued more than their home.  Surprisingly this could actually have a somewhat positive impact on the economy, although not the lenders, as it frees up cash flow for the borrower to consume other products—personal consumption is the largest component of U.S. GDP growth.

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