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First-Time Mortgage Default Rates Going Against Trends

Default rates rose for first time mortgages rose for the third month in a row, according to the latest S&P Dow Jones Indices and Experian released through October 2019 for the S&P/Experian Consumer Credit Default Indices [1]. Despite this rise in mortgage defaults, the indices shows that the composite rate was unchanged at 0.93%, as other forms of credit fell that month. The bank card default rate fell 44 basis points to 2.88%. The auto loan default rate was down two basis points to 1.03%, and the first mortgage default rate increased four basis points to 0.77%.

Three of the five major metropolitan statistical areas (“MSAs”) showed higher default rates compared to last month. New York showed the largest increase, up 11 basis points to 1.07%. The default rate for Dallas rose four basis points, to 0.97%, while the rate for Miami was up one basis point, to 1.31%. The level for Los Angeles dropped seven basis points to 0.65%, while the rate for Chicago was two basis points lower, at 1.17%.

The previous release [2] from S&P/Experian Consumer Credit Default Indices saw the first mortgage default rate increased four basis points to 0.73% in September 2019.

In an effort to further reduce future defaults on FHA-insured mortgages, the Federal Housing Administration (FHA) has signaled that it may tighten credit, noting that the debt-to-income (DTI) ratio for FHA-insured loans has been consistently increasing for six years. In a new report, Urban Institute examined  how important DTI ratios in predicting a borrower’s ability to make on-time mortgage payments, and how debt burden impacts ability to repay FHA mortgages.

According to Urban, DTI ratios are much less significant predictors of loan performance than FICO scores and that many high-DTI loans have strong FICO scores. Additionally, Urban’s analysis found that higher-DTI loans do not always have higher serious delinquency rates, and 5.6% of loans with DTI ratios ranging from 0 to 35% have been seriously delinquent at 60 months of age, compared with 7.6% of loans with DTI ratios of 35–45. But for loans with DTI ratios greater than 50, the D90+ rate at 60 months is 6.9%, lower than those with DTI ratios of 35–45.