Credit Research Part 3: The Recession and Mortgage Delinquencies

I've been blogging about the increase in US mortgage charge-offs during the Great Recession and its negative impact on homeownership. As the economy continues to recover, it is likely that lenders will start to relax their underwriting criteria—early indications of which have been confirmed by the OCC’s most recent Survey of Underwriting Criteria. Even so, it is unclear how long it may take before we observe a substantial uptick in the homeownership rate.

Why? In part, because there will still be a greater presence of delinquencies and other derogatory information on consumer credit files than before the recession. These delinquencies, especially in a relatively recent time period, equate to higher credit risk, which may give lenders pause in underwriting new mortgages for those borrowers.

So how quickly are delinquency rates recovering? First, let’s look at consumers with mortgages who had one or more 60-day delinquencies or worse on a mortgage in the prior two years:

Our research shows that these delinquency rates are falling but not yet at pre-recession levels. For Phoenix and Miami, in particular, the recession peaks were so high that it will take a few more years for these rates to return to something approaching pre-recession levels. The chart also reinforces that the effects of the recession arrived a bit later to New York, as I noted in a prior research post.

We ran the same analysis for consumers with serious mortgage delinquencies (90+ day past due or worse):

Serious delinquency rates have begun to recede in four of the six MSAs in this study: Las Vegas, Miami, Phoenix and San Francisco. This indicates that the US is well into recovery. And since the recessionary impacts on New York lagged other MSAs, it’s not surprising that this city’s 90+ delinquency rate is slower to recover.

It will take some time yet for the 90+ delinquency rate to return to pre-recession levels. That’s because it takes seven years for most derogatory information to come off consumer credit files. This chart confirms that the biggest increases in severe delinquencies and charge-offs occurred between 2007 and 2009. So I would not expect this credit indicator to decline substantively until seven years later, between 2014 and 2016 (assuming that the economy does not encounter a “double dip”).

Since our study looked at consumers with a mortgage balance, it’s likely that some of the substantial delinquency decline we see is due to consumers who have “dropped out” of the analysis population due to foreclosure. Still, the fact that we see the start of a decline is encouraging. It indicates that the consumers who still have mortgages have not been entering more serious stages of delinquency in the numbers observed during the downturn from 2007 to 2011.

Although the road to full mortgage recovery may take a while longer, the fact that we’re seeing declines in both moderate and severe delinquencies is a positive sign. In my next post, I’ll take a look at how HELOCs and home equity loans fared through the recession. Stay tuned to the blog!