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Current Credit Standards Tougher Than They Need to Be

by devteam January 3rd, 2015 | Share

What is an acceptable rate of mortgage delinquency?  A CoreLogic economist is using currentrndelinquency rates to argue that delinquencies will always be with us and thatrntoday’s underwriting standards are tougher than they need be.  </p

Molly Boesel, a senior economist with the company says the seriousrndelinquency rate (SDQ) in February 2010, near the height of the housing crisis,rnwas 8.6 percent.  Recent figures from CoreLogicrnshow 1.6 million SDQ mortgages – those 90 days or more past due or in foreclosure,rna rate of 4.2 percent.  </p

The overall SDQ rate is on the decline and loans originated in the last fourrnyears and especially in contrast with their immediate pre-crisis predecessors arernamong the most pristine loans made in the last 15 years.  Perhaps, she says, this indicates that creditrnstandards have been tightened too far.</p

While the current SDQ rate is 4.2 percent not all origination years arerncontributing equally to that number.  Originationsrnmade between 2004 and 2008 accounted for about 25 percent of active mortgagesrnat the end of September but were responsible for about 77 percent of those withrnserious delinquencies.  When thosernmortgages are eliminated the current SDQ rate drops to 2.1 percent.</p

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Boesel also presents the mortgages by year ofrnorigination in a more graphic manner, vintage curves or default fingers whichrncontrol for or remove time varying effects. rnThe figure below shows the SDQ rates for loans originated between 1999rnand 2013 at quarterly intervals over their first 5  years (although the new loans have not agedrnsufficiently for full analysis.)  Therndata is displayed in three panels for ease of analysis.rn</p

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In the first panel the delinquency rate wasrnroughly 2 percent for all but the 2000 vintage where it was 5.7 percent,rnpossibly exacerbated by an 8.05 average interest rate out of which manyrnborrowers were able to refinance in the following years.  By month 48 only 12 percent of thernoriginations that year were still active, leaving a representative group whornwere probably unable to refi due to credit or employment problems. </p

The second panel illustrates the years of the housing boom and burgeoningrnbust and SDQ rates nearing 18 percent for the 2006 and 2007 vintages.  The last panel is a view of post bustrnoriginations although only one has a full five-year curve.  Still it appears that these loans will have arnpeak SDQ rate of 2 percent or less with the exception of 2010, the year of thernfirst-time homebuyer tax credit.  </p

Boesel also illustrates that problem years have historically revealedrnthemselves early.  The 2006-2008 vintagesrnhad highly elevated SDQ rates within the first 12 months.  With those years removed it can be seen that evenrnin their earliest stages the recent crop of mortgages are performing extremelyrnwell.</p

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She notes that, “While it is tempting to blame the terrible performance ofrnthe worst vintages on exotic mortgage products, overall loose credit standards,rnpoor economic conditions, and the housing market crash that left borrowers withrnnegative equity are also to blame for poor performance.”  Figure 4 shows the “plain vanilla” type ofrnmortgage and while the level of SDQ is a bit lower than for mortgages overall,rnthe impact is minimal,  The 2005 to 2008rnvintage years for these owner-occupied, fully-documented, 30-year fixed-rate,rnconventional conforming purchase mortgage with a mid-to-high credit score andrnmoderate loan-to-value ratios still show outsized SDQ rates. </p

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Thus “the shrinking credit box” has effected post-bust performance but sornhas overall better economic and housing market conditions and she asks ifrncurrent vintages need to be so pristine. rnIt is clear that those mid-2000 originations are still drivingrndelinquencies while post 2008 vintages which make up 62 percent of active loansrnaccount for only 15 percent of SDQs.  Itrnis also clear, she says, that even when controlling for certain elements ofrnrisk those pre-bust loans are still more problematic than the newer ones.</p

While it remains to be seen what will happen with the economy and even goodrnunderwriting can’t eliminate delinquencies during periods of economic stress,rnBoesel concludes that,  “Given thatrnforecasts for the economy and unemployment rate indicate slow and steadyrnimprovement and for house prices to continue to increase at a moderate pace,rnthe excellent performance of current mortgage vintages gives some support tornthe notion that underwriting could be loosened in a responsible manner thatrnstill supports sustainable homeownership.

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About the Author

devteam

Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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