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Mortgage Delinquencies Keep Falling as Home Prices Rise

Brent Nyitray, CFA, MBA

Foreclosure Starts Fall 10% in October

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.

As a general rule, it takes time for Black Knight to process the data, so the most current report is usually from several months ago.

90-day mortgage delinquencies tick up to 4.8% in October

In general, mortgage delinquencies are falling as home prices rise and the foreclosure pipeline clears. In October, 90-day mortgage delinquencies stood around 4.8%. Delinquencies peaked around 10% and have now fallen back to their pre-bubble historical range of 4%–5%.

Note that Ocwen’s (OCN) issues with the regulators have put servicers on notice that they’ll be scrutinized closely. We’ll see if servicers pursue more modifications when a foreclosure would be in the best interest of the lender as a way to appease the government.

Falling delinquencies are good for non-agency REITs

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

The economic backdrop right now favors non-agency REITs. A combination of a better economy, skewed risk to the downside in interest rates, and increasing prepayment speeds favor taking credit risk over interest rate risk.

Investors who are interested in trading the mortgage REIT sector as a whole could look at the iShares Mortgage Real Estate ETF (REM) or the Vanguard REIT ETF (VNQ) for more exposure to the entire REIT sector.

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