Mortgage loan delinquencies spiked at their steepest rate in the past two years last month, according to the latest data from Fitch Ratings. New delinquencies rose among all types of loans.
Non-prime loans experienced the greatest annual increase in delinquencies in June, rising 21.8%. Expanded prime loans charted the second-highest increase, a 12.2% rise. RPL loans experienced a 6.4% annual incline, while prime loan delinquencies rose 5.5%.
Fitch noted that the new delinquencies are more a result of “the borrower’s ability to repay (FICO, employment status, DTI, etc.) rather than borrower’s incentive to pay (LTV).
For example, non-prime loans and expanded prime loans to self-employed borrowers are twice as likely to fall delinquent in May as loans to “waged” workers with the same loan types.
“FICO is a primary driver of delinquency rates,” Fitch said, noting that among Prime 2.0 loans, the delinquency rate for borrowers with FICOs of 675-750 was more than three times higher than for borrowers with FICO scores above 725.
On the other hand LTV does not correlate strongly with delinquency status, according to Fitch. “The amount of equity borrowers have in the home is not a primary driver for whether the monthly mortgage gets paid.”
With many mortgage loans in a state of forbearance, Fitch also noted in its report that, “Fitch views deferrals as a significant liquidity risk to transactions.”
Also, with mortgage rates low, refinance activity has been active, which translates to conditional prepayments, which Fitch generally views as “credit positive.” However, the rating agency did say that when voluntary repayments are high the result can be an “increased likelihood of adverse selection of loans remaining within the pool.”
Looking forward, Fitch says the housing market, and home prices, in particular, will depend on “the unemployment rate as well as income and rent growth.” Fitch expects home price growth to slow and even reverse in some markets.