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Mortgage Delinquencies Hit Post-Bubble Lows

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The Black Knight Financial Services Mortgage Monitor

The Black Knight Financial Services Mortgage Monitor is a monthly report that provides delinquency and foreclosure data. Mortgage originators use this data to benchmark their own originations.

Black Knight Financial Services—formerly known as Lender Processing Services—is a vendor for 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 down to 5.44% in October

In general, mortgage delinquencies are falling as home prices rise and the foreclosure pipeline clears. While 5.4% seems low compared to the peak of 10%, the normal level before the housing bubble was between 4% and 5%.

The decline also reflects the Obama administration’s mortgage modification push. Programs such as the Home Affordable Refinance Program (or HARP) and the Home Affordable Modification Program (or HAMP) allow distressed borrowers to refinance or modify their mortgages so they’re more affordable.

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The foreclosure pipeline is clearing. In judicial states—including New York and New Jersey—foreclosures have been an issue. 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 are good for non-agency REITs

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

Meanwhile, defaults act like prepayments. This means that agency REITs have to reinvest at lower rates. So, these REITs 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 rallied significantly over the past two years. The recovery of some previously low REITs is the result of the rebound in real estate prices.

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