Mortgage Delinquency Rates Continue to Improve

Data released by the Mortgage Bankers Association (MBA) indicates that the delinquency rate for mortgage loans on one-to-four-unit residential properties, considered single-family properties, decreased to a seasonally adjusted rate of 6.04% of all loans outstanding at the end of the second quarter of 2014, 7 basis points less than its level in the first quarter of 2014 and 92 basis points below its level one year ago. The serious delinquency rate has now reached its lowest level since the fourth quarter of 2007.

The year-over-year decline in the share of mortgages past due, measured on a not seasonally adjusted basis, reflected a decline across each stage of delinquency. In addition, the foreclosure inventory also fell. As Figure 1 below illustrates, the percentage of all loans past due fell by 84 basis points over the past four quarters. Loans 30-59 days past due fell by 47 basis points, loans 60-89 days past due fell by 13 basis points, and loans 90 or more days past due decreased by 24 basis points. The foreclosure inventory fell by 84 basis points over the past four quarters. In sum, the serious delinquency rate, the portion of loans either 90 or more days late or in the foreclosure inventory decreased by 108 basis points over the past year.

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An earlier post demonstrated that the serious delinquency rate was falling because recently originated mortgages were less likely to become seriously delinquent. This decline in the serious delinquency rate among more recent vintages of mortgage originations partly reflects tighter lending standards as represented by credit scores associated with mortgage originations. As Figure 2 illustrates, the rise in the serious delinquency rate among mortgages originated between 2005 and 2007 coincided with a decline in the weighted average FICO score for mortgages originated in those years.

Similarly, the decline in the serious delinquency rate of more recent vintages correlates with an increase in the weighted average FICO score of borrowers. Since 2013, the weighted average FICO score has come down slightly even as the seriously delinquent portion of mortgages originated in 2013 and in the first six months of 2014 continues to fall. However, despite the recent decline in the weighted average FICO score over the past 18 months, it is still above the 708 recorded in the years prior to 2006.

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The decline in the serious delinquency rate among more recent mortgage originations also coincides with a decrease in the share of mortgages where the unpaid balance exceeds the value of the underlying house, a situation where the borrower is considered “underwater”.  A previous post demonstrated that rising house prices have contributed to a decline in the share of underwater homeowners. Figure 3 shows that the decline in the share of mortgages originated in between 2008 and 2011 that subsequently became underwater, coincides with a decrease in the proportion of mortgages originated in those same years that subsequently became seriously delinquent.

Similarly, the rise in the serious delinquency rate among mortgages that were originated in 2006 and in 2007 relative to mortgages originating in 2005, coincides with an increase in the proportion of originations in 2006 and 2007 that ultimately became underwater. In recent years, the share of underwater mortgages exceeds the percentages recorded between 2009 and 2011 even as the percentage of seriously delinquent mortgages originated in those years fell. Despite the increase, the portion of mortgages originated in 2012 and 2013 that subsequently became underwater remains below the 5.7% rate recorded in the years prior to 2006. In addition, the uptick in the share of 2012 and 2013 mortgage originations that subsequently became underwater, combined with a decline in the serious delinquency rate for mortgages originated in those same years, may indicate that rising house prices are convincing these underwater borrowers to continue servicing their mortgage.

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