Editorial: A New Focus on REO.(Real Estate Owned )(Editorial)(Statistical data)

The new year is full of mixed blessings for mortgage servicing executives. Rates have remained reasonably stable, but refinancing activity is higher than many had expected. Delinquencies are creeping up, but not so far and so fast as some had feared.

It's that latter point that needs further attention from the industry. After years of relatively calm sailing in the default management arena, will 2007 be the year when increasing home borrower leverage, innovations in mortgage underwriting and sluggish housing markets conspire to drive up delinquency and default rates. We hope not, but we aren't ready to bet that the good times will last another year either. And we're ready to beef up our default management coverage as a result.

In December, the Mortgage Bankers Association reported that the overall home loan delinquency rate edged up to 4.67% in the third quarter of 2006. Foreclosures also inched up, but at a moderate pace. While that news isn't alarming in and of itself, the data shows that some slices of the mortgage industry are showing signs of a potential meltdown in credit quality. The subprime delinquency rate climbed 86 basis points to 12.56% in the third quarter. And 12.80% of FHA-backed loans were past due. Adjustable-rate home loans accounted for a big chunk of the increase.

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