Mortgage Delinquency Rate Drops

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NEW YORK ( TheStreet) -- Fewer Americans are behind on their mortgages, but the pace of improvement in delinquency rates remains slow, according to credit information provider TransUnion.

The number of Americans behind on their mortgage payments dropped 14% in 2012. The national mortgage delinquency rate -- in this case, the percentage of borrowers who haven't paid their mortgage for 60 days -- declined for the fourth consecutive quarter, dropping to 5.19% from 5.41% in the third quarter and 6.01% in the fourth quarter of 2011.

The default rate is still well above what is considered normal at 1.5% to 2%.

The slow pace of improvement in the default rate is partly because a high proportion of borrowers have not paid their mortgage in over a year. Excluding these borrowers, the delinquency rate drops to a much more reasonable 2.5%.

Banks have steeply increased credit standards since the bust in 2008 with the result that recent borrowers have been more prompt in their payments.

But banks are still dealing with thousands of borrowers who took out a mortgage in the height of the boom and have since defaulted. Many are stuck in the foreclosure process, which in some states such as Florida and New York now takes three to four years to complete thanks to the judicial foreclosure process.

TransUnion expects the rate to stay elevated at above 5% through 2013. "The declines in the mortgage delinquency rate will likely be muted for the foreseeable future as the foreclosure process in some states can take more than 1,000 days," said Tim Martin, group president of U.S. Housing at TransUnion's financial-services unit. "It's not clear yet, but recently announced regulatory rules related to mortgage servicing may tend to slow down this process further."

The Consumer Financial Protection Bureau recently released new rules that require mortgage servicers to wait at least 120 days before initiating foreclosure proceedings. Servicers will have to ensure that borrowers are offered various modification options before proceeding to foreclose.

"What is clear from the data TransUnion collects, is that, until the old vintages work through the system, we expect the delinquency rate to remain elevated," Martin said.

The upshot of all this for bank stock investors is that while rising home prices is good news, lifting demand for mortgages and lowering the likely default rate, banks are going to be dealing with high delinquency rates for some more time.

This limits their ability to "release reserves" and boost profits. Banks often make provisions in anticipation of credit losses. When these losses slow or reverse, they reduce the amount they set aside and reduce their reserves.

JPMorgan Chase (JPM) reduced loan loss reserves in its real estate portfolio by $700 million in the fourth quarter and said more releases would be likely as housing improves.