Are American homeowners loaded down with dangerously high mortgage debt, foreshadowing rising loan delinquencies and foreclosures just over the horizon?

Some Chicken Little "housing bubble" theorists would have you think so. But the hard statistics about homeowners' management of their mortgage debts suggest otherwise -- dramatically so.

In its latest quarterly delinquency and foreclosure survey, released last week, the Mortgage Bankers Association of America found that from the first quarter of 2003 through the same period of 2004, delinquency rates on all home loans in the United States dropped by more than half a percentage point.

Among "prime" mortgage borrowers --those with good credit at loan application -- the percentage of loans 30 days delinquent declined from 2.4 percent at the end of 2003 to 2.26 percent at the end of March 2004.

Douglas Duncan, the MBAA's chief economist, said the "trend is downward," indicating that most homeowners are handling their mortgage responsibilities well. Even subprime borrowers -- those whose low credit scores at the time of home purchase or refinance indicated higher risks of delinquency -- are doing better. The seasonally-adjusted subprime delinquency rate dropped 40 basis points (.4 percent) last quarter. Federal Housing Administration (FHA) borrowers also improved their on-time payment performances, lowering the FHA delinquency rate by 55 basis points (.55 percent).

By region, homeowners in the southern states tended to have the highest overall rate of late payments -- 4.72 percent delinquency, followed by the north-central states (4.0 percent), and the northeast (3.5 percent) and the west (2.65 percent).

Economists consider delinquency rates to be a key early-warning indicator of broad-based financial stress among home-owning households. When the economy slips into recession, or households max out their debtloads, delinquency and foreclosure rates both increase. However, the MBAA study found that the national foreclosure rate during the past year has dropped to 1.27 percent, down 16 basis points (.16 percent) from the first quarter of 2003.

The slow, steady decline in both serious delinquencies and foreclosures is attributable in part to the widespread adoption by lenders and mortgage servicers of "loss-mitigation" intervention strategies. Mandated by Fannie Mae, Freddie Mac and the FHA for all mortgage servicers doing business with them, loss-mitigation techniques include forbearance and loan-restructuring arrangements that allow borrowers to get out from under their arrearages. Sometimes short-term delinquent borrowers are kept out of serious delinquencies by reschedulings of their payments, or increases in the terms of their loans. The basic idea is to keep borrowers out of long-term delinquencies and foreclosures, provided their financial problems can be alleviated through short-term measures.

Published: June 21, 2004

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.