According to CoreLogic, there will always be some amount of delinquency in the mortgage market, but what is an acceptable level? At its worst during the housing crisis, the serious delinquency (SDQ) rate was 8.6 percent in February 2010. Recently, CoreLogic reported that there were 1.6 million SDQ mortgages in the U.S.—a rate of 4.2 percent of all active mortgages. Overall, the SDQ rate is on the decline, and a look beneath the surface shows that while loans originated from 2004 to 2008 drove the SDQ rate higher, loans originated in the past four years are among the most pristine loans made in the past 15 years. Does this low level of delinquency for the most recent originations indicate that credit standards have been tightened too far?
Do mortgage vintages really need to be as pristine as they have been in the most recent years? While there are many factors besides loan performance that should be considered in the policy decisions around access to credit, it is clear that mortgage originations made in the mid-2000s are still driving the SDQ rate, and originations made since 2009 are performing much better. Originations from 2009 to 2014 make up 62 percent of active loans, but only 15 percent of SDQs. It is also clear that even when controlling for certain elements of risk, the mid-2000 vintages still have high SDQ rates relative to the last few years.
What remains to be seen is what will happen with the economy, since even with good underwriting borrowers can still fall behind on payments due to economic distress. 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.
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