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LATEST CORELOGIC ECON TWEETS

Single-family Mortgage Default Rate Falls to pre-Recession Level

Loans Originated After 2008 Have Very Low Default Rates

Frank Nothaft    |    Videos

 

Single-family mortgage default rates have fallen sharply over the last few years, and finally this year have retreated to levels last seen prior to the Great Recession. Measuring default by the percent of loans that are seriously delinquent, defined as loans that are at least three months delinquent or are in foreclosure proceedings, CoreLogic has reported that 3.1 percent of loans were seriously delinquent in March, the lowest level since November 2007. The seriously delinquent rate is likely to decline further and could reach 2.5 percent by the end of this year. While that’s good news, even that rate is very high relative to history. It will likely be two more years before this default metric reaches a ‘normal’ level.

seriously delinq

seriously delinq

The seriously delinquent rate was below 2 percent for most of the period since the 1950s until the Great Recession (Figure 1). During the recession, the unemployment rate spiked and remained above 8 percent for more than four years, the longest time span with very high unemployment since the 1930s. Coupling that with a severe and widespread drop in home values added to the looming foreclosure crisis: The CoreLogic Home Price Index for the nation fell 32 percent from its 2006 peak to its trough, and some metropolitan areas had price declines that were double the national drop.

New FCL

New FCL

The default rate has fallen from its 2010 peak, as job and income growth have helped to repair family balance sheets, home-price growth has restored home equity for many owners, loan modifications have altered loan payments to enable borrowers to stay current, and foreclosure completions have eliminated debt.

Unfortunately, foreclosures will continue to occur as job loss, illness, and home-value declines will affect some borrowers. During the first three months of 2016, about 70 percent of loans that began foreclosure proceedings were originated prior to 2009 (Figure 2), even though these loans account for only 30 percent of loans currently outstanding.

post 2008

post 2008

Careful underwriting and economic growth can lessen the likelihood of default but not eliminate it. By comparing the serious delinquency rate by origination vintage, the effects of too lenient underwriting and a recession are clear: Loans originated from 2005 through 2008 had very high default rates during their first 5 years, with the 2006 vintage the worst: For 2006, the seriously delinquent rate hit 20 percent for loans that were outstanding after five years. In contrast, loans originated since 2009 have performed very well with default rates even lower than the 1999-2003 vintages (Figure 3).

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