High Risk Home Loan Mortgage Delinquencies Decline For the First Time in Four Years

Recently, "Alt-A" loan delinquencies were reported to have fallen for the first time in four years as a result of borrowers catching up on their home loan mortgage payments and taking advantage of loan modifications. According to Fitch Ratings, late payments on these high risk mortgages fell from 34.4 percent in March to 34.1 percent in April. This drop marks the first decline in this category since April 2006.

Despite this apparent turnaround in the housing market, delinquencies this past April were still up from 27.4 percent one year ago. Fitch Ratings also made it clear that modifications have been made to about 35 percent of subprime mortgage loans and about 8 percent of "Alt-A" loans from their initial terms, indicating a high risk of those loans going back in default. These numbers beg to question whether the housing market is finally beginning to turn around or whether this is simply a short-term result of seasonal tax refunds.

What This Trend May Mean for the Housing Market

"Alt-A" loans were a major factor in the sharp rise in mortgage delinquencies that contributed to the subprime mortgage crisis. These high risk loans required little to know documentation from the borrower demonstrating their ability to pay them back, making them particularly risky. For the time being, home loan mortgages in Florida and California constitute over half of "Alt-A" loans outstanding all across the nation.

Fitch Ratings also announced an interesting inverse trend between subprime mortgage delinquencies and prime jumbo mortgages; whereas late payments on subprime mortgages held by those with less than ideal credit ratings fell for the second straight month this past April, from 46.3 percent to 45.2 percent, prime jumbo delinquencies offered to borrowers with more reliable credit histories rose by almost 100 basis points this year after nearly tripling in 2009. This rise in prime jumbo delinquencies is probably caused by unemployment benefits running out and by the continuing lag in consistent job openings.

The recent decline in "Alt-A" loan and subprime mortgage delinquencies may point to an impending upturn in the housing market, but for now, it's uncertain whether these signs of stability are a temporary seasonal effect of tax returns. This past May, Fannie Mae, which is now under conservatorship of the Federal Housing Finance Agency (FHFA), reported another sharp loss during the first quarter of the year, requesting another $8.4 billion of taxpayers. They cautioned that home prices will decrease slightly, foreclosures will rise and mortgage defaults will remain high.