Mortgage delinquencies continued to decline in October according to information released today by Lender Processing Services.  At the same time foreclosure inventories reached a record high during the month, now representing 4.29 percent of all active mortgages.

The total delinquency rate in the country is now 7.93 percent down from 8.09 percent in September and 9.29 percent in October 2010.  The delinquency rate is now 30 percent below the peak reached in January 2010.  However, as the average days of delinquency have steadily increased, so has the foreclosure inventory, i.e. those properties that will in all probability become owned real estate (REO) at some point.  The pre-foreclosure inventory now stands at a rate of 4.29 percent, up from 4.18 percent in September and 3.92 percent a year earlier.

The average delinquent loan in foreclosure has been delinquent for 631days.   At the beginning of the foreclosure crisis an average foreclosure took 251 days from the first missed payment.  The length of the process has increased by three months just since the beginning of this year.  The average days that a loan is seriously delinquent (90+ days) before the foreclosure process is implemented, however, declined for the second straight month in October and is now 388 days.

There were over 200,000 foreclosure starts in October with about 42 percent of them being repeat starts, as persons who were previously in foreclosure and cured or were able to modify their loans fell into trouble again.  Repeat starts have increased about ten percentage points in the last three months.

Judicial vs. non-judicial foreclosure processes remain a significant factor in the reduction of foreclosure pipelines from state to state, with non-judicial foreclosure inventory percentages less than half that of judicial states. This is largely a result of the fact that foreclosure sale rates in non-judicial states have been proceeding at four to five times that of judicial. Non-judicial foreclosure states made up the entirety of the top 10 states with the largest year-over-year decline in non-current loans percentages.

The states with the highest percentage of non-current loans are Florida, Mississippi, Nevada, New Jersey, and Illinois. 

FHA loans originated in the period 2008 to 2009 are defaulting at record rates.  Nearly $25,000 million in loans from that vintage have missed more than 15 payments and another $18,000 million have missed 12.

The October data also showed that mortgage originations are on the rise, reaching levels not seen since mid-2010. Mortgage prepayment rates have also spiked, as much of the new origination is related to borrower refinancing; loans originated in 2009 and later are the primary drivers of the increase. As they have since the beginning of the housing crisis, the GSEs and FHA continue to represent the majority of the market, now a total of 87 Percent as of the end of Q2. 

Spurred by a strong demand for rental housing and low property prices, investors are buying more houses according to the latest Campbell/Inside Mortgage Finance HousingPulse Tracking Survey.  The report says that investor purchases represented 22.3 percent of closed transactions for the month of October, the third straight month that investors have held a share greater than 20 percent.  The October figure is considerably higher than the 18 percent investor share reported earlier this week by the National Association of Realtors®. 

Campbell says that October prices for damaged bank-owned real estate (REO) fell to a two year low of $101,100 against an average for non-distressed residential properties of $255,700.  The falling price of distressed properties and the sheer number on the market is pushing home prices down overall.  The total proportion of distressed home sales, as represented by the HousingPulse Distressed Property Index (DPI), rose a full 4 percentage points to 48.4% in October.

The gap between the supply of distressed properties and their absorption by first-time homebuyers has now widened to 13.7 points in October compared to 8.8 points in September, indicating that first-time homebuyers have become less active in the distressed property housing market.

The retreat of first-time buyers, the prime market for the kind of starter-level house favored by investors, coupled with low prices are starting to make buying, repairing, and renting more attractive to investors than flipping properties.  The final factor is the strong demand for rental units.  Campbell Surveys estimates that 61.6% of investor properties purchased during the month of October will be rented out, with the remainder being flipped.

A real estate agent from Nevada told editors of the HousingPulse, "Investors are prominent in the city of Las Vegas. They both flip and rent and buy properties in bulk. Renting single family homes is an extremely viable option and seems to be a growing trend in the valley with the decreasing of prices. Our inventory is dropping so we are seeing more investors becoming aggressive with their offers."

The report quoted a second agent from California that, "Given the current conditions in the market here locally, many of the investors are purchasing homes to rent until the market turns around then possibly looking to sell in a few years. Yes, at this point renting homes is a better option than flipping because the gap between what an investor can buy a house, fix it and flip it does not cover the cost of re-selling it," 

Freddie Mac reported on Thursday that homeowners continue to hit barriers when looking to refinance their home, although it's not clear whether this is due to caution or because they have little equity left in their homes to do otherwise, or simply because they cannot qualify. We'd point toward all of the above as the main hindrances.

During the first quarter of 2011, only 25 percent of those who refinanced existing mortgages pulled cash out of their home.  Even more striking, 21 percent took our smaller loans than the ones they were refinancing.  The percentage of homeowners whose loan balance remained unchanged, 54 percent, was the highest since Freddie Mac began keeping track of such figures in 1985.  Freddie Mac defines a "cash-out" mortgage as one in which the new principal balance exceeds the old one by more than 5 percent.

During the quarter an estimated $6 billion in net home equity was cashed out during the refinance of conventional prime-credit home mortgages compared to 9.1 billion the previous quarter.  When adjusted for inflation this is the lowest net equity cashed out in a single quarter since the third quarter of 1996. 

The average home being refinanced during the quarter depreciated in by 6 percent since the old loan was put in place which was a median period of five years.  In comparison, the Freddie Mac House Price Index shows a 21 percent decline in its U.S. series between the end of 2005 and the end of 2010. "Thus, borrowers who refinanced in the first quarter owned homes that had held their value better than the average home, or may reflect value-enhancing improvements that owners had made to their homes during the intervening years."  Those who refinanced got a median interest rate reduction for a 30-year fixed-rate mortgage of about 1.2 percentage points or a savings of about 20 percent in interest costs.

Frank Nothaft, Freddie Mac vice president and chief economist said, "The average interest rate on single-family mortgages outstanding at the end of 2010 was about six percent, so there are still plenty of homeowners that can benefit from refinancing. We found the typical borrower reduced their interest rate about 1.2 percentage points by refinancing during the first quarter. For a 30-year fixed-rate mortgage with a $200,000 loan balance, that's a monthly payment savings of about $150."

Freddie Mac, in its press release compares the 25 percent of cash-out mortgages in the first quarter to the average cash-out share over the past 25 years of 62 percent and the $6 billion in equity pulled out in the most recent period with the 83.7 billion cashed out in the second quarter of 2006, the peak of the refinancing frenzy.  It is illustrative of the sea change in housing finance to look more closely at other figures from that mid decade period.

During 14 quarters spanning January of 2005 to June 2008 Americans pulled $887.1 billion in cash out of the equity of their homes, an average of $63.4 billion a quarter.  That didn't include $109.7 in outstanding home equity lines of credit, equity they had utilized as cash previous to refinancing, which they consolidated during that period.  They did this through refinancing their first mortgages at levels that averaged an increase of 24.1 percent more than the balance of the loan they were refinancing.

In the first 10 quarters after the market started to crash in earnest, total cash-out dollars as a percentage of aggregate refinanced originations declined steadily, from 23.4 percent in the third quarter of 2008 to 3.4 percent in the fourth quarter of 2010.  Freddie Mac reports this figure increased slightly in the first quarter to 4.3 percent.  

During all of 2010 a total of $33.2 billion was cashed out of mortgages.  This is only slightly more than the $31.5 billion that was cashed out in the second quarter of 2008 alone. And then the music ended.