Mortgage delinquencies increase

The Federal Reserve said Tuesday that the delinquency rate on banks’ residential real estate loans climbed last quarter to the highest level in four years.

The share of the loans on which payments were at least 30 days overdue rose to 2.11%, the highest since the fourth quarter of 2002, from 1.72% the previous three months, according to data posted on the Fed’s website. The data aren’t adjusted for seasonal patterns.

The deterioration in credit quality comes in a period of sustained gains in employment and incomes, a sign that weaker underwriting standards, not economic stress, may be to blame. Fed policymakers this year have repeatedly said that mortgage losses were concentrated in sub-prime loans, which are designed for lower-income borrowers.

“The real issue here is whether this is a story confined to a small portion of the household sector or is this something that becomes a broader macroeconomic story?” said Brian Sack, a former Fed economist who is now a vice president at Macroeconomic Advisers in Washington. “Some households are in trouble.”

Sub-prime loan delinquencies rose to 12.6% in the third quarter from 11.7% in the previous three months, according to the Mortgage Bankers Assn. That caused at least 20 lenders to go out of business, scale back or sell themselves in the last five months. The perceived risk of owning sub-prime mortgage bonds jumped to a record for an eighth day Tuesday.

An index of credit-default swaps on 20 securities rated BBB that was created in the second half of 2006 fell 6.3% on Tuesday to 63, according to New York-based derivatives broker GFI Group Inc. The ABX-HE-BBB-07-1 index has fallen by more than a third since trading started Jan. 18.

Sub-prime mortgages are given to people with poor or limited credit records or high debt burdens and typically have rates at least two or three percentage points above safer prime loans. They made up about a fifth of all new mortgages last year, the Washington-based Mortgage Bankers Assn. said.

“Banks and non-banks have been making a lot of loans without regard for borrower ability to repay” after introductory rates adjust, said Alys Cohen, an attorney at the National Consumer Law Center in Washington.