Third quarter results are providing indications that the mortgage finance market may finally be returning to pre-recession normalcy.
A recently released survey from the Mortgage Bankers Association (MBA) revealed that national mortgage loan delinquency and foreclosure rates are as low as they have been since 2008, and the third-quarter earnings reports provided by Fannie Mae and Freddie Mac reveal that the two government-sponsored enterprises have almost fully reimbursed taxpayers for their housing-bubble-induced bailouts.
Liquidity and sustainability
Freddie Mac reported its eighth straight profitable quarter and the second-largest pretax income in company history, totaling $6.5 billion, according to a Mortgage News Daily report. The $23.9 billion worth of released valuation allowance on deferred tax assets contributed greatly to the GSE's $30.5 billion net income for the third quarter, which allowed it to eclipse its taxpayer draw by a fraction of a percent. Fannie Mae has now returned more than 97 percent of its draw.
And while the two GSEs' renewed stability - even liquidity - is attributed primarily to the release of mortgage loans that originated before 2007, the evidence of housing market viability is not limited to their full return to their feet.
The MBA's National Delinquency Survey supports speculation that the damage inflicted by sloppily underwritten pre-recession loans may finally be in the past. Through the third quarter, the seasonally adjusted delinquency rate fell to 6.41 percent, a drop of 55 basis points from the second quarter and a 99-point fall on a year-over-year basis - representing its lowest level since the second quarter of 2008. Delinquent loans are defined as those 30 days or more past due but not yet in foreclosure, according to Mortgage News Daily.
The foreclosure inventory has also returned to pre-recession levels, standing at 3.08 percent through the third quarter, 25 basis points below where it stood through the second quarter of 2013 and 99 below the figure seen through the third quarter of 2012. The rate at which foreclosure actions were initiated also fell to its lowest level since 2007 - from 0.64 percent to 0.61 percent - while serious delinquencies (loans more than 90 days past due or in foreclosure) plummeted by 23 basis points from the second quarter of 2013 and 138 points on a year-over-year basis.
No new bubble
Perhaps most tellingly, the combined number of loans that have missed one payment or more or are somewhere in the foreclosure pipeline represent 9.75 percent of the outstanding mortgage loan total. That figure represents a basis-point decline of 138 since the third quarter of 2012, and is the lowest seen since 2008. It all amounts to significant evidence that homeowners are emerging from the debt-induced hardships of the recession, and that the current rate of price appreciation seen in metro areas like Boston, New York, San Diego and San Francisco is the result of renewed viability, not a harbinger of another bubble to come.
"Finally, mortgage delinquencies are the result of local economic conditions, not the cause of them," said Jay Brinkmann, MBA chief economist and senior vice president of research and education. "Clearly local home price bubbles and the temporary injections from cash out refinancing and speculation temporarily boosted some areas and made the subsequent economic crash even worse, but we are now at a point where local economic growth and population movements will determine housing demand and mortgage performance. Those areas with the weaker climates for economic growth will see home value and delinquency problems that are beyond the abilities of the mortgage industry and housing regulators to impact in a meaningful way."
It's an important distinction - the one between healthy growth and the sort of unsustainable inflation that precipitated the housing market's downturn in 2008 - especially considering the industry's intentions to transfer more of the capital from the currently dominant GSEs back to the private market. With Fannie and Freddie all but free of their debts to the public and the majority of homeowning demographics back on their financial feet, that transfer appears more possible than it has at any point in the past five years.
In statements that accompanied the survey, Brinkmann did acknowledge that foreclosure rates may remain above historic norms in certain states, such as New Jersey and Florida, where the judicial processes are different and tend to drag out proceedings at a slower rate, ultimately skewing statistics through backlog. But the continued transition away from pre-2008 loans will provide enhanced liquidity for all lenders moving forward and reveal itself statistically.
"While Florida still leads the nation in the percentage of loans in foreclosure, that percentage is falling," Brinkmann said. "In contrast, New York and New Jersey were the only two states that saw an increase in the percentages of loans in foreclosure."
Many New Jersey and New York residents experienced significant hardship during and after Superstorm Sandy in late 2012, and so the foreclosure data in those two states is partially attributable to extenuating circumstances.