Mortgage delinquencies fell in third quarter

NEW YORK (Reuters) - The U.S. mortgage delinquency rate declined last quarter amid hints of improvement in the job market, but persistent defaults and rising foreclosures are keeping the housing outlook muddied, the Mortgage Bankers Association said on Thursday.

The rate of delinquency on single-family homes for the third quarter fell 0.72 percentage point from the previous quarter to 9.13 percent, the MBA said in its quarterly study. It was 9.64 percent a year ago.

The report gives little reprieve to U.S. housing worries that have mounted in the past two months as reports of faulty foreclosure processes has highlighted the volume of troubled loans clogging the banking system. Efforts to ease loan payments for borrowers with loan modifications have also disappointed as falling incomes disqualify borrowers from such help.

Falling delinquencies "is a positive sign but we are still facing two significant headwinds," said Michael Fratantoni, the MBA's vice president of research and economics.

"First, we have a 9.6 percent unemployment rate and though we are getting some job growth, it's fairly anemic. That is suggesting we are not going to see a significant improvement in the delinquency rate from here," he said.

The U.S. this month said businesses added 151,000 jobs in October for the first increase since May. The unemployment rate held at 9.6 percent for a third month.

The MBA's other key worry is the potential for 4.5 million foreclosed homes to hit the market over the next three to four years, on top of the 4 million currently listed, he said.

Foreclosure starts in the three months through September climbed 0.23 percentage point to 1.34 percent, and hit a record for the prime fixed rate loans. Unlike riskier loans originated during the housing boom, the deterioration in prime mortgages is more directly tied to the nation's economic condition, Fratantoni said.

"You have a situation where if the homeowner falls behind on their mortgage, home sales are so weak it's really difficult for them to sell it and get out from under that obligation," he said. "So problem loans continue to push through the process."

It may get tougher for creditworthy borrowers. The average 30-year fixed mortgage rate jumped to 4.39 percent in the last week from 4.17 percent, the first rise in eight weeks, mortgage finance giant Freddie Mac reported on Thursday.

The percentage of loans in the foreclosure process -- or foreclosure inventory -- fell to 4.39 percent from 4.57 percent and 4.47 percent a year earlier. It was heaviest in Florida, Nevada and New Jersey, it said.

The MBA's data likely doesn't yet reflect the foreclosure halts announced by major loan servicers in late September and early October. But the banking group expects the foreclosure inventory to rise this quarter an into early 2011.

Any resulting drop in foreclosure sales would temporarily ease the swelling supply of homes on the market, it said.