SF Default Rates: One of These Things Is Not Like the Others, One of These Things Just Doesn’t Belong

The Financial Accounts of the United States shows continued improvement in the aggregate home equity position of U.S. households.

Household holdings of real estate, measured on a not seasonally adjusted basis, totaled $21.104 trillion in the first quarter of 2015, $1.092 trillion higher than its level, $20.012 trillion, in the first quarter of 2014. At the same time, home mortgage debt outstanding, $9.371 trillion in the first quarter of 2015, fell by $3.4 billion over the same period. Since the total value of household-held real estate rose over the year while the aggregate amount of mortgage debt fell, then home equity held by households rose. Over the year, total home equity held by households grew by $1.096 trillion, 10.3%, to $11.734 trillion. Household’s home equity is now 55.6% of household real estate.

A previous post illustrated that mortgage debt secured by single-family residential real estate has been shrinking since reaching a peak of $11.241 trillion in 2007*. In the 7 subsequent years, 2008-2014, mortgage debt outstanding secured by single-family residential real estate declined by 12.0% to a revised level of $9.887 trillion.  In contrast, loans secured by multifamily residential real estate rose by 25.2% to a revised level of $999 billion, rising in every year except 2010. As of the first quarter of 2015, residential mortgages secured by single-family residential real estate fell to $9.855 trillion while mortgage debt outstanding that is secured by multifamily residential real estate has expanded to $1.020 trillion.

Presentation1

In addition to originations, the change in the amount of mortgage debt outstanding also reflects the dollar volume of defaults. By itself, mortgage defaults shrink the amount of mortgage debt outstanding. According to the Federal Deposit Insurance Corporation’s Statistics on Banking, the default rate of mortgage debt secured by multifamily residential real estate did not rise as high as the default rate on mortgage debt secured by single-family residential real estate. In addition, data from the Statistics on Banking suggests that, during more normal times, the default rate on mortgage debt secured by multifamily residential real estate tends to be lower than the default rate on mortgage debt secured by single-family residential real estate.

The Federal Deposit Insurance Corporation’s Statistics on Banking provides data on the balance sheets of depository institutions. The Statistics on Banking is a quarterly publication compiled by the Federal Deposit Insurance Corporation (FDIC) that provides detailed aggregate financial information as well as key structural data, such as the number of institutions and branches for all FDIC-insured depository institutions. The measurement of outstanding loans secured by residential real estate, both single-family and multifamily, in the FDIC’s Statistics on Banking closely tracks similar data provided by the Federal Reserve Board’s Financial Accounts of the United States.

According to Figure 1 above, between the end of 2000 and the end of 2006, the default rate on mortgages secured by single-family residential real estate averaged 0.1%, but the default rate on mortgages secured by multifamily residential real estate was virtually zero over this same period. Between 2006 and 2009, the default rate on mortgages secured by single-family residential real estate rose from 0.1% to 2.1%. Meanwhile the default rate on mortgages secured by multifamily residential real estate increased from 0.0% in 2006 to 1.1% in 2009, peaking at 1.2% in 2010.

In recent years, default rates of both mortgages secured by single-family residential real estate and mortgages secured by multifamily residential real estate have declined significantly. Although the default rate on single-family residential real estate remains above its average level during a more normal period, the default rate on mortgages secured by multifamily residential real estate has returned to its pre-crisis average level. As shown in Figure 1, the default rate on mortgages secured by single-family residential real estate was 0.3% at the end of 2014, above its 0.1% average level between 2000 and 2006. However, at 0.0%, the default rate on mortgages secured by multifamily residential real estate has returned to its pre-crisis average level.

Presentation2

Overall, the default rate on mortgages secured by single-family residential real estate typically exceed the default rate on mortgages secured by multifamily residential real estate, during both a period of relative calm and years of considerable duress. However, the higher default rate of mortgages secured by single-family residential real estate reflects the higher default rates associated with junior-liens and home equity loans. Meanwhile, the default rate on first-lien mortgages secured by single-family residential real estate mirrors the default rate of mortgages secured by multifamily residential real estate.

According to Figure 2 above, the default rate on junior-lien mortgages secured by single-family residential real estate averaged 0.3% between 2002, the first year of available data, and 2006. Over this same period the default rate on home equity loans secured by single-family residential real estate averaged 0.1%. However, the default rate on first-lien mortgages secured by single-family residential real estate was virtually nonexistent between 2002 and 2006, similar to the experience of mortgages secured by multifamily residential real estate.

During the financial crisis, the rise in default rates was more pronounced among junior-lien mortgages and home equity loans secured by single-family residential real estate. Meanwhile, the increase in the default rate on first-lien mortgages secured by single-family residential real estate generally mirrored the rise in the default rate on mortgages secured by multifamily residential real estate. As illustrated in Figure 2 above, the default rate on junior-lien mortgages secured by single-family residential real estate soared to 6.0% in 2009 and the default rate on home equity loans secured by single-family residential real estate peaked at 2.9% in 2009. Meanwhile, the default rate on first-lien mortgages secured by single-family residential real estate reached a high of 1.1% in 2009. In that year, the default rate on mortgages secured by multifamily residential real estate was also 1.1%. It peaked at 1.2% in 2010.

Since peaking, default rates have declined significantly. However, the default rates of both junior-lien mortgages secured by single-family residential real estate and home equity loans secured by single-family residential real estate remain especially elevated while the default rates of both first-lien mortgages secured by single-family residential real estate and mortgages secured by multifamily residential real estate have either normalized or are near-normal.

As shown in Figure 2, by the fourth quarter of 2014, the default rate on junior-lien mortgages secured by residential real estate fell to 1.1%. However, this is still 0.8 percentage points above its 2002-2006 average of 0.3%. At the same time, the default rate on home equity loans secured by single-family residential real estate ended 2014 at 0.6%, 0.5 percentage points above its 2002-2006 average of 0.1%. Meanwhile, first-lien mortgages secured by single-family residential real estate was 0.2% at the end of 2014, only 0.2 percentage points above its 2002-2006 average of 0.0% and mortgages secured by multifamily residential real estate are virtually nonexistent, its state in the years leading up to the financial crisis.

*The mortgage debt outstanding data used to measure household equity differs from the mortgage debt outstanding data used to describe trends in the amount secured by single-family and multifamily real estate. According to the Federal Reserve Board, the home mortgage debt outstanding that is used in this post to describe trends in the outstanding amount of mortgage debt secured by single-family, but not secured by multifamily, is an input into the home mortgage debt outstanding that is used in this post to calculate household equity.

Specifically, the mortgage debt outstanding that is used to describe household equity, Line 33 of Table B.101, takes the mortgage debt outstanding that was used to describe trends in single-family secured real estate, Line 2 of Table L.217, and subtracts both home mortgages secured by non-financial corporate businesses, Line 3 of Table L.218, and home mortgages held by non-financial non-corporate businesses, Line 4 of Table L.218.



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