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Why 90-day delinquencies tick up slightly in June

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Aug. 21 2014, Published 4:40 p.m. ET

90-day delinquencies tick up slightly in June

The Black Knight Financial Services Mortgage Monitor is a monthly report that provides delinquency and foreclosure data.

Black Knight Financial Services—formerly known as Lender Processing Services—is a vendor to mortgage originators. It handles mortgage processing and default management outsourcing. As a result, it comes across a wealth of top-down mortgage information that many professionals and analysts use to help make strategic decisions.

90-day mortgage delinquencies tick up to 5.7% in June

In general, mortgage delinquencies are falling as home prices rise and the foreclosure pipeline clears. While 5.7% seems low compared to the peak of 10%, the “normal” level prior to the housing bubble was in the range of 4%–5%.

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This also reflects the Obama administration’s mortgage modification push. It has used various programs like the Home Affordable Refinance Program (or HARP) and the Home Affordable Modification Program (or HAMP). The programs allow distressed borrowers to refinance or modify their mortgages into something that’s more affordable.

The foreclosure pipeline is clearing. It’s mainly an issue in what have been dubbed “the judicial states” like New York and New Jersey. Non-judicial states have shorter timelines between delinquency and foreclosure. Judicial states require a judge to approve foreclosures. They often press the borrower and lender to find a way to keep the borrower in their home.

Declining delinquencies mean good things for non-agency REITs

Non-agency real estate investment trusts (or REITs) like PennyMac (PMT), Two Harbors (TWO), or Redwood Trust (RWT) take credit risk. In contrast, agency REITs that invest in government-guaranteed or government-supported mortgages, such as Annaly (NLY) and American Capital (AGNC), don’t take credit risk.

However, defaults act like prepayments. This means that these REITs have to reinvest at lower rates. So, they aren’t completely insensitive to delinquencies. Falling delinquencies are extremely important to non-agency REITs—especially those that invest in the junior tranches of securitizations. These bonds are high-risk and high-reward. This portion of the mortgage-backed securities market has rallied significantly over the past two years. Some REITs that had been extremely low have recovered due to the rebound in real estate prices.

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