What is an acceptable rate of mortgage delinquency?  A CoreLogic economist is using current delinquency rates to argue that delinquencies will always be with us and that today's underwriting standards are tougher than they need be.  

Molly Boesel, a senior economist with the company says the serious delinquency rate (SDQ) in February 2010, near the height of the housing crisis, was 8.6 percent.  Recent figures from CoreLogic show 1.6 million SDQ mortgages - those 90 days or more past due or in foreclosure, a rate of 4.2 percent. 

The overall SDQ rate is on the decline and loans originated in the last four years and especially in contrast with their immediate pre-crisis predecessors are among the most pristine loans made in the last 15 years.  Perhaps, she says, this indicates that credit standards have been tightened too far.

While the current SDQ rate is 4.2 percent not all origination years are contributing equally to that number.  Originations made between 2004 and 2008 accounted for about 25 percent of active mortgages at the end of September but were responsible for about 77 percent of those with serious delinquencies.  When those mortgages are eliminated the current SDQ rate drops to 2.1 percent.



Boesel also presents the mortgages by year of origination in a more graphic manner, vintage curves or default fingers which control for or remove time varying effects.  The figure below shows the SDQ rates for loans originated between 1999 and 2013 at quarterly intervals over their first 5  years (although the new loans have not aged sufficiently for full analysis.)  The data is displayed in three panels for ease of analysis.



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

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

Boesel also illustrates that problem years have historically revealed themselves early.  The 2006-2008 vintages had highly elevated SDQ rates within the first 12 months.  With those years removed it can be seen that even in their earliest stages the recent crop of mortgages are performing extremely well.



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



Thus "the shrinking credit box" has effected post-bust performance but so has overall better economic and housing market conditions and she asks if current vintages need to be so pristine.  It is clear that those mid-2000 originations are still driving delinquencies while post 2008 vintages which make up 62 percent of active loans account for only 15 percent of SDQs.  It is also clear, she says, that even when controlling for certain elements of risk those pre-bust loans are still more problematic than the newer ones.

While it remains to be seen what will happen with the economy and even good underwriting can't eliminate delinquencies during periods of economic stress, Boesel concludes that,  "Given that forecasts for the economy and unemployment rate indicate slow and steady improvement and for house prices to continue to increase at a moderate pace, the excellent performance of current mortgage vintages gives some support to the notion that underwriting could be loosened in a responsible manner that still supports sustainable homeownership.