Trends Suggest Delinquency Rate May Head Lower.

Washington -- It may be a modest trend, but the delinquency rate on home loans appears to be improving, and some industry economists are optimistic that the trend will continue.

In the third quarter, the percentage of home loans more than 30 days past due fell to 4.41%, edging down from 4.43% in the second quarter. The third-quarter figure was 24 basis points lower than it had been a year earlier.

The foreclosure situation was similar, with the inventory of loans in foreclosure dipping to 1.14%, down just two basis points from the previous quarter but now at its lowest point in four years. The rate of loans entering the foreclosure process, at 0.39%, was down five basis points from a year earlier.

Doug Duncan, chief economist of the MBA, said in a conference call with reporters that the improvement in delinquency and foreclosure rates had been expected, and he thinks the trend will continue, citing the benefits of economic growth and "steady, modest" job creation.

"These improvements override the effects of the increased subprime and ARM shares and the aging of the young mortgage portfolio. We expect this trend of modestly declining delinquencies and foreclosures to continue," he said.

But with the origination of adjustable-rate loans and products like interest-only loans rising, Mr. Duncan said the MBA is keeping a watch on how these loans perform. Mr. Duncan noted that ARM originations have been running at historically high levels in the MBA's weekly loan application survey.

Currently, 17% of the prime credit quality loans in the MBA's delinquency survey are ARMs, while 54.7% of subprime loans are ARMs. "To the extent there is a risk component ...