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More People Pay Their Mortgages On Time But How Long Will This Good News Last
By Kenneth R. Harvey
February 27, 2019
The Washington Post, Real Estate
It’s a real estate and social barometer that doesn’t get a lot of publicity, but it’s important: More Americans are paying their mortgages on time today than they have in nearly two decades — maybe even longer.That’s a big deal, because when large numbers of owners do the opposite — stop paying on their home loans formonths at a time — the entire economy feels the effects. Spiking delinquencies in 2007-2008 ushered in theglobal financial crisis and spawned tidal waves of foreclosures that devastated borrowers and theircommunities. Some of the wounds are still fresh. Delinquency rates may sound like a yawn, but they are a keyeconomic bellwether that shouldn’t be ignored by anyone serious about real estate.So here’s the good news: The national delinquency rate on home loans hit the lowest level in 18 years as of thefinal quarter of 2018, according to data compiled by the Mortgage Bankers Association. Borrowers withconventional mortgages, those eligible for sale to investors Fannie Mae and Freddie Mac, are the bestperformers; about 97 percent of them are paying on time. Borrowers with Federal Housing Administration insured (FHA) mortgages pay late nearly three times more frequently; even so, more than 91 percent of themare on time. The big gap between homeowners with conventional loans and FHA borrowers shouldn’t besurprising, because FHA borrowers have lower credit scores, higher debt-to-income ratios and lower downpayments on average. All three factors multiply the risk that borrowers will pay late. Yet even at 8.65 percent,the current FHA delinquency rate is much better than it was a decade ago, when it hovered about 14 percent.Overall, says Freddie Mac Chief Economist Sam Khater, U.S. homeowners are performing better today in termsof on-time payments and foreclosure avoidance than they have in 30 years.What’s contributing to this good behavior?It’s no secret: Since 2010, stricter federal underwriting rules imposed on the mortgage industry have bannedsome of the lending industry’s previous worst habits, and required them to screen out high-risk borrowers —essentially limiting their customer base to people who can truly afford the mortgages they’re seeking. In theconventional market, that’s why Fannie Mae and Freddie Mac — the country’s two largest sources of mortgagemoney — have kept their average FICO credit scores near a relatively pristine 750, well above levels typicalbefore the financial crisis. (FICO scores run from 300 to 850, with low scores indicating a high probability offuture delinquencies and foreclosures.)
An improving economy has helped significantly, as well. Mortgage interest rates continue to be below historicalaverages. Unemployment has fallen steadily and is at or near multi decade lows.Plus many of today’s owners are sitting on sizable equity gains as they pay down mortgage balances on theirhomes while price inflation pushes their values up. The Federal Reserve estimates homeowner equity totals astunning $1.5 trillion, the highest ever. For some owners, that cushion functions as an insurance policy shouldanything threaten their ability to pay the mortgage.How long can the current impressive performance continue? No one can be certain, but here are a couple ofobservations. Mortgages originated in the past several years under strict federal rules constitute what lendersand investors call “the cleanest book of business” they’ve seen in many years. If the lending industry begins torelax underwriting standards in any significant way to dig deeper into the pool of riskier credit applicants topump up their volume of home-purchase mortgages, it’s inevitable that delinquencies will rise.Some evidence exists that a modest loosening of standards got underway last year. Homeowners’ demand forrefinancing dissipated with rising interest rates, and some lenders began easing standards to include a broadermix of applicants. FICO itself confirmed in a study that average credit scores were on the decline in the home mortgage arena. Fannie Mae relaxed its policy on debt-to-income (DTI) ratios for buyers, allowing moreapplicants with DTIs up to 50 percent to pass muster for a loan. Previously, the cutoff was 45 percent.Meanwhile, the FHA has seen notable declines in average credit scores and is approving low-down-paymentpurchasers with DTI ratios well above 50 percent.Steps like these may appear — and be — helpful for marginally qualified first-time buyers. But what will theylook like through hindsight during the next recession?Ken Harney’s email address is email@example.com.