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The default rates for first and second mortgages has been up and down for nearly all of 2015, and in October, both rates were on the way up. The first mortgage default rate jumped by five basis points up to 0.81 percent and the second mortgage default rate spiked by nine basis points up to 0.56 percent, according to the S&P Dow Jones Indices and S&P/Experian Consumer Credit Default Indices for October 2015.
October’s increases for the mortgage default rates followed a September which showed declines of eight basis points (down to 0.76 percent) for the first mortgage default rate and 10 basis points (down to 0.47 percent) for the second mortgage default rate. The historic lows for the first and second mortgage default rates are 0.74 percent and 0.42 percent, respectively, both reached in May 2015. The S&P/Experian Consumer Credit Default Indices were launched in May 2010.
The first mortgage default rate did, however, decline year-over-year in October by 15 basis points, from 0.96 percent down to 0.81 percent. Meanwhile, the second mortgage default rate was up over the year in October by nine basis points from the 0.47 percent rate reported in October 2014.
The month-over-month increases in mortgage default rates for October are simply normal fluctuations in the market, according to David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices.
“The increase from 0.76 to 0.81 for first mortgage defaults is 0.05 or about one-fifth of one standard deviation–not enough of a move to raise any concerns,” Blitzer said. “The sample size for second mortgages is rather small and those figures are less reliable. Altogether, I didn’t see anything in the report to raise immediate concerns.”
The composite credit default index, which includes first and second mortgage defaults as well as defaults on bank cards and auto loans, increased by five basis points from September to October up to 0.94 percent. The only one of the four indices comprising the composite default index that declined month-over-month in October was the bank card default rate, which dropped by two basis points down to 2.75 percent. The composite default index has also been up and down all year—prior to October’s increase, the composite index declined by seven basis points from August to September. It is down by 12 basis points over the year, however (from 1.06 percent in October 2014).
Even with the increase up to 0.94 percent in October, the composite default index is still only six basis points higher than its historic low of 0.88 percent, also from May 2015.
“Despite recent modest increases, consumer credit default rates remain at low levels,” Blitzer said. “Defaults for bank cards had popped up somewhat in April, but subsequently fell back to the pace seen at the start of this year. At the same time, total bank card, or revolving, credit outstanding as reported by the Federal Reserve has been growing more rapidly in the past few years. The year over-year growth increased from about 1% in 2012 to almost 5% in the third quarter of 2015. Non-revolving credit is also expanding at a stable 7.5% year-over-year pace in the last three years.”
The Fed is expected to raise rates in December, but it should not have a significant impact on consumer defaults, according to Blitzer.
“Following the last Employment Situation Report on November 6 showing an increase of 271,000 jobs in October, the consensus for when the Fed will raise interest rates has focused on the FOMC meeting on December 15 and 16,” Blitzer said. “Most Fed watchers expect the target range for Fed funds to be raised to 25 to 50 basis points from the current range of 0 to 25 bps. The probability of a Fed move in December is about 70 percent based on trading in Fed fund futures at the CME. This long-expected increase is not expected to dampen consumer spending or lead to any near-term move in consumer credit defaults.”
