Serious Delinquency Rate of Condo Loans Drops to Less Than 1 Percent in Top 25 Markets

Condo Loans originated in 2015 and 2016 have performed the best

By Archana Pradhan Mortgage Finance, Risk Management

Condo mortgages today have the lowest serious delinquency rate since 2007.[1] The decline in local unemployment rates and rise in home prices have helped reduce the overall delinquency rate. The delinquency rate for condos is lower than for other single-family residence (SFR) mortgages (Figure 1). The lower delinquency rate for condos suggests underwriting guidelines are stricter for condos compared to other SFRs. The delinquency rate for condos was higher than the rate for other SFRs during 2008 to 2012. As a result, the Government Sponsored Enterprises (GSEs) and Federal Housing Administration (FHA) tightened their lending standards. For instance, the current lending guidelines for condo mortgages not only focus on the borrower’s creditworthiness and ability to repay but also on even better fiscal and physical health of the condo community, such as more capital reserve and higher owner occupancy rates.

Serious Delinquency Rate by Property Type

A closer look reveals that today’s delinquency rates are heavily influenced by older loans. The bulk of both condo and other SFR loans that were seriously delinquent in early 2019 were originated between 2003 and 2009 (Figure 2). About 63% of the condo loans that were seriously delinquent in February 2019 were originated between 2003 and 2009 compared to just 27% originated between 2010 and 2018. Both condo and other SFR loans originated in 2007 had the highest delinquency rate, whereas loans originated in 2015 had the lowest delinquency rate.

Serious Delinquency Share by Loan Vintage

Figure 3 compares the serious delinquency pattern by origination year.[2] Each line in the figure represents the serious delinquency rate for loans originated in a given year as a function of number of months since the loan was originated. Analyzing these vintages imparts three important trends. First, delinquency rates were much higher for all loan types originated between 2006 and 2008. Performance of all types of loans started to improve gradually beginning with the 2009 vintage as the underwriting standards tightened and the economic recovery began mid-2009.[3] Second, the delinquency rate for other SFR loans was higher than condo loans. Third, in general, condo and other SFR loans originated in 2015 and 2016 have performed the best, with the lowest 15-month delinquency rate in more than a decade.

Serious Delinquency Rate by Loan Vintage

[1] Serious delinquency is defined as 90 days or more past due or in foreclosure proceedings. Metro areas used in this analysis are the top 25 largest Core Based Statistical Areas determined based on total condo mortgage originations in 2018.

[2] Texas, Florida and Puerto Rico were excluded in the comparison of the national delinquency rate for yearly vintages to avoid the effects of the 2017 natural disasters.

[3] The National Bureau of Economic Research has identified the January 2008 through June 2009 period as an economic recession, and recovery began July 2009; see http://www.nber.org/cycles.html.

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