RATES FOR BOTH MORTGAGE DELINQUENCIES and foreclosures dropped in 2004, according to the Mortgage Bankers Association. By the end of 2004, 4.23 percent of mortgage payments were late by 30 days or more, down from 4.49 percent a year earlier. The foreclosure rate—1.12 percent—hit its lowest point since the third quarter of 2000.

Doug Duncan, chief economist and senior vice president of the Mortgage Bankers Association, attributes the declines to a stronger economy last year. He says though economic growth is expected to slow slightly, job growth and only modest interest rate hikes will lead to continued declines in delinquencies.

The delinquency and foreclosure rates for borrowers using ARMs in particular dropped steeply: Prime ARM loan delinquencies dropped from 2.81 percent to 2.11 percent.

That drop is likely linked to the age of many ARM loans, Duncan says. In 2004, ARMs comprised 35 percent of new mortgages. (Young mortgages are more likely to be repaid on time than old ones because banks can make accurate assessments of new buyers' ability to pay.) The probability of delinquencies peaks when mortgages are between three and five years old, Duncan says, adding that “the risks associated with larger ARM shares in a rising-rate environment signify the importance of tracking delinquencies and foreclosures moving forward.”

New foreclosures rose slightly (from 0.39 percent to 0.44 percent) between the third and fourth quarters of 2004. Part of that rise comes from an all-time high in FHA-insured loans entering the process: 1.05 percent during the fourth quarter, up from 0.91 percent a year earlier. That's largely due to the trend of lower-risk borrowers opting for conventional loans rather than FHA-backed mortgages, leaving FHA with higher-risk borrowers who tend to default more, says Laurie Maggiano, deputy director of HUD's Office of Asset Management.

HUD foreclosed on 77,000 homes last year, but Maggiano is quick to add that the department also provided assistance for 78,000 delinquent borrowers to remain in their homes. Additionally, Maggiano's office is considering ways to increase default counseling with some of the $40 million dedicated to housing counseling. “Every year we have increased loss mitigation,” she says. “If we hadn't provided opportunities for 78,000 owners to keep their homes last year, I shudder to think what the [foreclosure] rate would have been.”