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Mortgage Defaults Continue to Surge Higher

The Mortgage Brokers Association released the results of their National Delinquency Survey for the third quarter of 2008 last Friday. The seasonally adjusted delinquency rate for mortgages on one-four unit residential properties was at 6.99%, up from 6.41% in the previous quarter and up from 5.59% a year ago. This is the highest on record since the survey began in 1979.  Foreclosures started were at 1.07% down from 1.08% in the previous quarter and 0.78% a year ago.  The percentage of loans in the foreclosure process for the third quarter was 2.97%, up from 2.75% in the previous quarter and 1.69% a year ago.  9.96% of all loans are now delinquent or in the foreclosure process.

Subprime delinquencies rose to 20.03% from 18.67% in the previous quarter and 16.31% a year ago. However, delinquencies are not confined to subprime, prime mortgage delinquencies rose to 4.34% up from 3.93% in the second quarter of 2008 and 3.12% in the third quarter of 2007. Prime delinquencies averaged 2.37% from 2003 - 2006.

Last month, the Federal Financial Institutions Examination Council (FFIEC) released their statistics on mortgage and consumer loan delinquencies. Their definition of a 30 day late is a loan that is over 30 days late when the bank reports (page 501 on this manual). For example if a loan had a March 1st due date and payment was not received by March 31st, then the MBA survey would count that as 30 days late. The FFIEC report would count not count that as "over" 30 days late. If they payment was not received by April 30, then the FFIEC methodology would count that as over 30 days late but not "over" 60 days late. Therefore, the FFIEC numbers for a 30 day late are in between the MBA's 30 day and 90 day delinquency numbers. Nevertheless, the FFIEC delinquencies are showing similar spikes up to the MBA 30 and 90 day delinquencies. Consumer loan delinquencies rose but at a slower pace in the third quarter. Consumer delinquencies spiked up during the last two recessions and did not start to fall until after the recession ended.

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Mortgage and Consumer Loan Delinquencies Continue To Spike Up.

The Mortgage Brokers Association released the results of their National Delinquency Survey for the first quarter of 2008 today. The seasonally adjusted delinquency rate for mortgages on one - four unit residential properties was at 6.35%, up from 5.82% in the previous quarter and up from 4.84% a year ago. Foreclosures started were at 0.99% up from 0.83% in the previous quarter and 0.58% a year ago. Both of these percentages are the highest on record since the survey began in 1979.

Subprime delinquencies rose to 18.79% from 17.31% in the previous quarter and 13.77% a year ago. However, delinquencies are not confined to subprime, prime mortgage delinquencies rose to 3.71% up from 3.24% in the fourth quarter of 2007 and 2.58% in the first quarter of 2007. Prime delinquencies averaged 2.37% from 2003 - 2006.

Last month, the Federal Financial Institutions Examination Council (FFIEC) released their statistics on mortgage and consumer loan delinquencies. Their definition of a 30 day late is a loan that is over 30 days late when the bank reports (page 501 on this manual). For example if a loan had a March 1st due date and payment was not received by March 31st, then the MBA survey would count that as 30 days late. The FFIEC report would count not count that as "over" 30 days late. If they payment was not received by April 30, then the FFIEC methodology would count that as over 30 days late but not "over" 60 days late. Therefore, the FFIEC numbers for a 30 day late are in between the MBA's 30 day and 90 day delinquency numbers. Nevertheless, the FFIEC delinquencies are showing similar spikes up to the MBA 30 and 90 day delinquencies.

Consumer loan delinquencies are also spiking up. Consumer delinquencies spiked up during the last two recessions and did not start to fall until after the recession ended. It is alarming that we are having this acceleration in delinquencies without the severe effects of a recession like rising unemployment and big drops in personal income.

The stock market is pricing in that the worst is behind us. However, the delinquencies are continuing to accelerate. Home price depreciation is also accelerating. The charts are the inverse image of a falling knife. I believe it is too early to call the bottom yet especially if we do enter a full blown recession.

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Consumer loan growth is flat for March

U.S. Consumer debt increased in March 2008 by $15.3 billion on a seasonally adjusted basis. During the first quarter, consumer debt increased by $34 billion, the most since the first three months of 2001 before the 2001 recession. Growth in consumer debt dropped dramatically during the recession. This is typical of recessions. Consumer debt usually peaks before the start of the recession and declines during a recession as consumers tighten their belts and banks tighten their lending standards.

The headlines from the media on consumer debt suggest that the "slowing economy is forcing Americans to accumulate credit-card and other forms of debt." This would be going against the grain of the pattern of declining growth of consumer debt during recessions. On a non-seasonally adjusted basis, consumer debt actually declined by $16.3 billion since December 2007. It is the seasonal adjustments that lead to an increase of $34 billion. Year over Year on a non-seasonally adjusted basis the growth rate has turned flat. The growth rate usually vacillates with steep slopes in the growth rate. The periods where it is flat is typically at the tops and bottoms. Meanwhile, mortgage delinquencies are rising at a faster pace than consumer loan delinquencies. While consumer loan and mortgage delinquencies normally rise and fall together, consumer loan delinquencies have typically been more volatile than mortgage delinquencies. This time around, it looks like the problems are being driven by the housing crisis.

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Credit Card Delinquencies Rise and Growth Slows

The Wall Street Journal had an article on Credit Cards on their front page Friday. Here are some quotes:

America's love affair with credit cards may be headed for the rocks.

Credit-card delinquencies are rising across the nation, a sign that
some Americans are at the end of their rope financially.

In December, an average of 7.6% of credit-card loans were either at
least 60 days delinquent or had gone into default, up from 6.4% a year earlier,
according to research firm RiskMetrics Group.

Taking a look at consumer loans (including installment loans such as auto loans), delinquencies are about average. They can and probably will get a lot worse. During the past two recessions, delinquencies have risen during recessions and have peaked a few months after the recession. In the past consumer loan delinquencies have been more volatile than residential mortgages. Consumer delinquencies rose sooner and faster leading delinquencies in mortgages. This time around, it is the mortgage delinquencies that are rising faster.

Per the Wall Street Journal: "Yesterday, the Federal Reserve reported an abrupt slowdown in consumers' credit-card borrowings. In December, Americans had $944 billion in total revolving debt, most of it on credit cards, a seasonally adjusted annualized increase of 2.7%. That was off sharply from seasonally adjusted growth rates of 13.7% in November and 11.1% in October."

Revolving debt has grown at a pace of 7.5% this year. Monthly changes in debt are very volatile. Last month’s slowdown is not uncommon. October and November’s numbers were artificially high. Just this April, debt slowed to a growth rate of 0.6%. However the months before and after were at 10.0% and 12.8%.

Consumer debt goes through very pronounced cycles. Looking at consumer debt growth over since 1952, growth usually slows dramatically during a recession. Personal Income usually leads changes in consumer debt.

Looking at the rapid increases in mortgage delinquencies and the relatively moderate levels of consumer debt, it points to the housing crisis as being the driving factor. Consumer debt will follow, but it is not the cause.

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