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Credit Research: Are US Mortgages Recovering?

The Great Recession hit the mortgage industry particularly hard in comparison to other loan types. How far along are US mortgages on the road to recovery? New FICO research offers some answers.

Before I dig into the research specifics, I’ll share one positive note from our findings: in general, mortgage charge-off rates are now well within the range of rates observed prior to the recession. Delinquency rates have not quite returned to 2005 levels, however. Given the unprecedented nature of the mortgage market in 2005 (dramatic year-over-year home price appreciation coupled with easy access to credit), we may not see such low delinquency rates in the near term.

Our study examined 1-year credit performance from 2005-2012 for consumers within six Metropolitan Statistical Areas (MSAs). For example, the most recent 2012 timeframe represents an October 2012 scoring date and measures performance from November 2012 through October 2013.

We selected New York, San Francisco and Washington DC to represent how better-performing MSAs handled the economic crisis. On the other hand, since Miami, Phoenix and Las Vegas experienced comparatively greater price depreciation and mortgage charge-off rates, we selected these cities to be benchmarks for the other extreme.

If a credit score does not include any macroeconomic inputs (as is the case with the baseline FICO® Score), we expect two things to happen during economic bad times—both of which were examined in our research:

  1. Probability of default: Repayment performance by FICO® Score band tends to deteriorate during an economic downturn, as consumers have more difficulty meeting loan obligations.
  2. Score distribution: As consumers struggle to pay bills and that information is reflected in their credit bureau files, the overall score distribution starts to skew lower. In other words, more consumers score in the lower ranges, indicating higher risk.

Probability of default

 

Looking at consumers with at least one active mortgage trade, the performance of those with the lowest credit scores (less than 580) did indeed deteriorate substantially through the worst of the economic downturn:

Mortgage Research 1-Year-Charge-Off-Rates-Score_580For instance, this chart shows that of consumers in Miami with at least one active mortgage trade and a FICO® 8 Score of less than 580 as of October 2008, 65% had at least one mortgage charge-off over the subsequent year. Miami had the highest charge-off rate, and New York the lowest charge-off rate for these low-scoring consumers.

Recovery has been slow for these consumers—but we are seeing improvements. In 2006, mortgage charge-off rates in these cities ranged from 10% to 25%. In 2008, they ran from 25% to 65%. And in the most recent observation, this unit loss rate ran from 12% to 21%—except for Miami at 38%, which seems to be slower to recover.

It is not unreasonable to think that charge-off rates will continue to decline. But it’s more questionable whether they will decline below the 4%-13% unit rates observed in 2005. That’s because the prior charge-off rates were supported by a house price bubble of a magnitude that is not present in most economic cycles.

The story is a bit different for consumers with at least one active mortgage trade who maintained excellent credit scores throughout the recession:

Mortgage Research 1-Year-Charge-Off-Rates-Score_800

Here we see the relative resiliency of the better-performinging MSAs in comparison to the more poorly performing MSAs. Miami appears to have been a bit of a canary in the coal mine, as charge-off rates for these consumers with high credit scores led both the pick-up into the recession and the recovery in rates thereafter. On the other hand, Las Vegas was the hardest hit, and it clearly has not recovered as fully as the other five MSAs.

Just how good was mortgage performance in 2005? For this study, we used data from a 5% sample of all US consumers appearing at one particular credit bureau. As of October 2005, there were 34,951 consumers in the sample from the Washington DC MSA with a FICO® 8 Score of 800 or higher. Not a single one of these consumers had a mortgage charge-off in the following 12 months.

Score distribution

The other half of the mortgage perfomance story of the Great Recession is how the distribution of FICO® Scores shifted for US consumers with at least one open mortgage trade. As expected, more mortgage consumers had FICO 8 Scores less than 580 during the worst of the economic downturn:

Mortgage Research Percent-Score_580

Once again, Miami appears to continue to struggle in comparison to the other MSAs. The other five MSAs have roughly 7% or fewer consumers with low credit scores, and they appear to have largely reverted to their pre-recession figures. But Miami continues to have over 13% of consumers with a score less than 580, about 50% more than the pre-recession figure.

This chart also highlights that the recession was relatively late in coming to the New York MSA. For this MSA, the peak in percentage of consumers with low FICO® Scores did not come until 2009, compared to a peak in 2008 for all other MSAs.

On a bright note, the percentage of consumers with high credit scores steadily increased throughout this timeframe:

Mortgage Research Percent-Consumers-Score_800

Many would find it rather surprising that more people are in the highest credit score ranges. Indeed, the Great Recession was hard on the US economy, with many consumers losing their homes at rates not seen in the past twenty years—and, likely, since the Great Depression. But clearly, a significant portion of consumers buckled down and maintained a close watch over their credit obligations. Amid all the economic gloom and doom of this period, it’s a seldom-discussed silver lining, showing the resiliency and credit savvy of many US consumers.

In the coming weeks, I'll be sharing more research on consumer mortgage behavior and trends as impacted by the Great Recession. In my next post, I’ll ask: how has homeownership fared in the wake of the crisis? To find out, be sure to check back.

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