Mortgage delinquencies decline

NEW YORK (CNNMoney) -- The mortgage meltdown that began five years ago appears to be reversing course as the percentage of loans that fell into delinquency slowly returned to normal rates and fewer loans fell into foreclosure.

On a seasonally adjusted basis, 7.58% of mortgage borrowers were late on their loan payments during the last three months of 2011, according to the Mortgage Bankers Association. That was down 0.67 percentage points from 12 months earlier and 2.5 percentage points from the peak set in the first quarter of 2010.

"That's a pretty substantial decline," said Mike Fratantoni, the MBA's Vice President for Single-Family Research and Policy. "We're about halfway back from the peak."

The improved mortgage performance reflected continued improvements on the jobs front and in the broader economy, according to Jay Brinkmann, chief economist at the MBA.

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He also said the the 0.28 percentage-point decline in loans on which foreclosure actions were started during the fourth quarter is a good predictor of fewer future bank repossessions. During the quarter, foreclosure starts dropped to below 1%, a healthy decline from the 1.4% peak logged in the third quarter of 2009 and significantly closer to the long-term average of slightly under 0.5%, he said.

The delinquency numbers could have been even better except for forces that kept mortgages in the default process longer. As a result of the robo-signing scandal, banks taken greater pains to make sure their paperwork is in order. That has meant that many loans have gotten stuck in the foreclosure pipeline longer, boosting delinquency rates.

The delays have been especially long in states, like Florida and New York, where the courts are involved in the foreclosure process.

In such judicial foreclosure states, the percentage of loans stuck in foreclosure inventory is at 6.8% and growing. Meanwhile, in non-judicial states, only 2.8% of loans are stuck in the pipeline and that percentage is shrinking.

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The $26 billion foreclosure settlement between major mortgage lenders and the U.S. Department of Housing and Urban Development and attorneys general from 49 states and the District of Columbia should bring greater clarity and speed to the foreclosure process.

That could reduce delinquency rates substantially, according to Fratantoni, and bring them even closer to long-term, historical rates.

One category that failed to show improvement during the quarter were delinquencies on mortgages insured by the Federal Housing Administration. The percentage of FHA loans that were past due rose to 12.36% from 12.09% a quarter earlier and from 12.27% 12 months earlier. Seriously delinquent FHA loans increased to 9.02% from 8.39% and 8.46%.

Brinkmann attributed the increase to the fact that a much larger percentage of the FHA's loan portfolio has been issued during the past few years and those loans are now entering into the dangerous years for mortgages, the three or four years after issue when delinquency rates start to peak.

Just two years, 2008 and 2009, account for 53% of the seriously delinquent loans in the FHA's portfolio. Brinkmann expects delinquency rates for loans issued during those years to continue to rise.

"The key question, though, is: What did the FHA plan for? and our understanding is that the delinquency rate is below what the FHA was expecting," he said.