The delinquency rate for first-lien mortgage loans on 1-4 unit residential properties decreased to a seasonally adjusted rate of 4.99% of all loans outstanding at the end of the third quarter of 2015, 31 basis points less than its level in the second quarter of 2015 and 86 basis points below its level one year ago. According to a report by the Mortgage Bankers’ Association, the serious delinquency rate has now reached its lowest level since the first quarter of 2007.
The 4-quarter decline in the share of mortgages past due, measured on a not seasonally adjusted basis, reflected a decline across each stage of delinquency. On a not seasonally adjusted basis, the percentage of all loans past due fell by 88 basis points over the quarter. Loans 30-59 days past due fell by 19 basis points, loans 60-89 days past due fell by 12 basis points, and loans 90 or more days past due decreased by 57 basis points.
At the same time, the foreclosure starts rate fell 6 basis points over the past year and now sits at .38%. Over nearly 5 years, 2011 to the third quarter of 2015, the rate of foreclosure starts has been steadily declining. During the period including 2002 to 2005, the foreclosure starts rate remained low and relatively steady, however, it began a sustained climb beginning in 2006, peaking at 1.27% in 2010. Since peaking in 2010, the foreclosure starts rate of mortgages secured by 1-4 unit family homes has fallen and is now more closely aligned with the levels recorded prior to the crisis.
The decline in default rates reflects a decrease at both larger banks and smaller banks. However, the decrease at larger banks has been greater. A previous post illustrated that the Top 20 depository institutions, as measured by total loans and leases, account for about half of 1-4 unit first-lien residential mortgage debt outstanding and the rest of the depository institutions combined hold the rest. During the financial crisis the net charge-off rate at larger banks exceeded the rate at smaller banks, but as the overall net charge-off rate has declined in recent years, reflecting a decrease in the net charge-off rate at both larger and smaller banks, the gap in the net charge-off rates between these two groups has shrunk.
According to bank-level analysis of the Consolidated Reports of Condition and Income, commonly referred to as “call reports”, between 2002 and 2006, the net charge-off rate overall was relatively low and stable. The net charge-off rate is the difference between the dollar amount of charged-off loans in a given year and the amount, in aggregate, that was recovered during the same year. This difference is expressed as a share of the total amount of 1-4 family first-lien residential mortgage debt outstanding. The low and stable overall net charge-off rate over this period, 2002-2006, reflected similarly low and steady net charge off rates at larger and smaller banks.
Beginning in 2007, the net charge-off rate overall began to rise noticeably as the net charge-off rate at both larger banks and smaller banks climbed. However, the rate at larger banks consistently exceeded the overall, or average, net charge-off rate, while the rate at smaller banks was typically below the overall net charge-off rate.
After peaking in 2009, the net charge-off rate overall began its descent and both the rate at larger banks and the rate at smaller banks contributed to the decline. Although the net charge-off rates at both larger and smaller banks began to fall in 2010, the net charge-off rate at larger banks fell more. By 2015, the net charge-off rate at larger banks and at smaller banks are now consistent with pre-crisis levels.
Not only was the crisis characterized by rising default rates, but also a widening gap between the net charge-off rate at larger banks relative to smaller banks. In 2006, when the overall net charge-off rate was 0.1%, the net charge-off rate at larger banks exceeded the rate at smaller banks by 3 basis points. In 2007 the gap was 9 basis points but, by 2010, the gap had reached 91 basis points.
In contrast, the decline in the default rate has coincided with a closing of the gap between the net charge-off rate at larger institutions and the rate at smaller ones. After reaching a peak of 91 basis points in 2010, when the net charge-off rate was 1.4%, the gap between the default rate at larger banks relative to smaller banks began to shrink. By 2014, the net charge off rate at smaller banks exceeded the rate at larger banks by 5 basis points. In 2015, the net charge off rate at larger banks is 5 basis points greater than the rate at smaller banks.