More Good News for Housing: Mortgage Delinquencies Down in 2012

A recent report showed that mortgage loan delinquencies dropped by nearly 14% in 2012. This bodes well for the housing market in 2013, because it will likely lead to a lower number of foreclosures.

The report was published earlier today by TransUnion, one of the companies that compile loan-payment information on U.S. consumers. According to TransUnion, the mortgage delinquency rate in the United States dropped for the fourth straight quarter in a row.

In the fourth quarter of 2011, the national delinquency rate was 6.01%. By the end of 2012, it had fallen to 5.19%, a decline of nearly 14%.

Drop in Delinquencies Good for Housing Market

In this context, a mortgage delinquency occurs when a homeowner is at least 60 days delinquent on the mortgage payment. While not all delinquencies end up in foreclosure, the two trends do track closely together. A significant drop in delinquencies typically corresponds to a drop in foreclosure filings down the road. All of this is good for the housing market.

A large percentage of delinquent homeowners do actually end up in foreclosure. And, as we know, a high foreclosure rate can wreak havoc on the housing market. Having a high percentage of distressed properties for sale hurts the market in two ways.

First, it contributes to inventory surplus. If there is not enough demand to compensate for the added surplus, prices will drop. Secondly, distressed properties (short sales, foreclosures, etc.) tend to be sold below market value. Both of these things can erode home prices over time.

So a drop in mortgage loan delinquencies can be viewed as a positive sign for the broader housing market.

Normalizing, Slowly But Surely

Granted, the delinquency rate is dropping much more slowly than it rose. At the height of the housing and mortgage crisis, mortgage delinquencies skyrocketed. As TransUnion reports, they rose by 54% in 2007, 53% in 2008, and 50% in 2009. So we still have a ways to go. But this is clearly a step in the right direction.

Tim Martin of TransUnion explained that, despite the recent improvements, ‘vintage loans’ are keeping the national delinquency rate historically high. “The elevated delinquency levels that we still are experiencing are a result of older vintage loans — borrowers who haven’t been making their payments for a rather long time that are still in the system, inflating the overall rate.”

Still, the company expects the rate to continue falling through the fourth quarter of 2013.

More than 80% of U.S. metropolitan areas experienced an annual decline in mortgage delinquencies. This trend was measured from the fourth quarter of 2011 to the same period in 2012. The biggest decline occurred in the Los Angeles housing market, where the delinquency rate dropped by nearly 34%. Memphis, Philadelphia, Detroit and Baltimore also had notable declines (above 25%).

This is one of many positive trends we are seeing in the housing market right now. Home prices rose last year in many parts of the country, and that trend appears to be continuing in 2013.

We have also seen a drop in foreclosure starts in many metro areas. A foreclosure “start” is one step beyond a delinquency. This is when the bank initiates the paperwork necessary to repossess the home. Foreclosure starts hit a six-year low at the end of 2012, according to RealtyTrac.

At the same time, housing inventory has dropped in almost every major metropolitan area. Consider Los Angeles, for example. This was one of the cities hit hardest by the housing crisis. It’s now in a solid state of recovery going into 2013. As noted earlier, L.A. had the largest drop in mortgage delinquencies. It has also experienced a significant decline in the overall number of homes for sale. According to, the number of real estate listings in the Los Angeles metro area dropped 40% over the last year. Home prices are rising there as well.

This is just one example of a formerly troubled housing market that is now well along the road to recovery. We will no doubt see more of these in 2013.