Mortgage Default Rates Are Years Away From 'Normal'

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NEW YORK ( TheStreet) -- The health of the mortgage market improved significantly in 2012, with nearly every risk indicator heading down, the Mortgage Bankers Association said in its quarterly National Delinquency Survey .

The delinquency rate for one-to-four residential mortgages -- the percentage of loans that are at least one payment behind but not in foreclosure -- fell to a seasonally adjusted 7.09% of all loans outstanding at the end of the fourth quarter, the lowest level since 2008.

The serious delinquency rate -- the share of loans at least 90 days behind or in foreclosure -- fell 95 basis points from a year earlier to 6.78%.

The foreclosure inventory rate -- the percentage of loans in the foreclosure process -- was 3.74%, the lowest since the fourth quarter of 2008.

"With fewer new delinquencies, the foreclosure start rate and foreclosure inventory rates continue to fall and are at their lowest levels since 2007 and 2008, respectively," said Jay Brinkmann, MBA's chief economist and senior vice president of research.

An improving jobs market, rising home prices and the strong credit quality of recent originations are helping to lower the delinquency rate.

The number of delinquent borrowers have also declined because they have, in effect, ceased to be borrowers. Banks are pursuing more short sales to resolve delinquent loans, thus reducing the number of delinquent borrowers without increasing the foreclosure pipeline, which in some states is only growing longer.

The survey also highlighted the continuing disparity between states based on the way they process foreclosures.

States that follow a judicial foreclosure process -- in which the bank needs to prove the borrower is in default in court before pursuing foreclosure action -- continue to show an elevated foreclosure rate, as long timelines have created a large and growing backlog of foreclosures.

The average foreclosure rate in judicial states, which includes Florida, New York and New Jersey, among others, is at 6.2%, three times the 2.1% average of non-judicial states.

"In those cases, the ultimate reduction in the number of loans in foreclosure will have less to do with the recovery of the economy and the housing market than with the return to reasonable foreclosure timelines," the report said.

The economists also noted that the percentage of loans at least 90 days past due ticked up from the third quarter on a non-seasonally adjusted basis to 3.04%. That means foreclosure actions could rise in the coming months.

While delinquency rates overall are heading in the right direction, they remain well above the normal rate of less than 1%.

Mike Frantotoni, vice president of MBA, said in a conference call that we are still "two to three years away" from getting to the historically normal level of delinquency and that is "if the economy cooperates."