Saturday, April 4, 2009

Troubling statistics regarding federal mortgage relief programs

Delinquency rates are surging, up 7.88% in the fourth quarter of 2008 (Q4 2008) according to the Mortgage Bankers Association (MBA). Both the quarterly change and the share of delinquencies are the highest since the series was first measured in 1972. Furthermore, troubling statistics at the Office of Thrift Supervision show that government interventions through Q4 2008 have failed to halt mortgage default rates.
The chart illustrates delinquency rates (percentage of delinquent loans out of loans outstanding) by loan type: subprime, prime, and total loans = subprime+prime+FHA+VA. Delinquency rates are making records across all loan types, with prime delinquencies hitting 5.1% in Q4 2008. The delinquency data include loans that are at least one payment overdue and not yet in the foreclosure process; clearly some of these loans will enter the foreclosure process soon.

Foreclosures in 2008 were up 225% since 2006, and according to the delinquency rates, that number is set to worsen in 2009.

The chart to the left illustrates the annual change in delinquency rates across all loan types for each quarter of 2008. Every loan type saw a significant increase in the pace of delinquencies in Q4 2008.

For prime lending, which accounts for 77% of total loan issuance (source: MBA), the annual surge in Q4 2008 was the greatest on record. And since the labor market has only worsened since Q4, 2.1 million jobs lost Jan-March 2009 versus 1.7 million jobs lost Oct-Dec 2008, the Q1 2009 prime delinquency rate has likely risen.

In response to the sharp increase in delinquencies and foreclosures, the government put in place several (seriously, I have lost count) programs to backstop mortgage defaults. However, a recent study at the Office of Thrift Supervision indicates that government mortgage relief programs have so far failed to halt mortgage defaults. From the LA Times:
In the last three months of 2008, most troubled borrowers were being offered not true modifications but breathers on payments followed by a resumption of the original mortgage terms, or even higher payments.

Moreover, many of the mortgages that were modified were falling back into default, according to the report, which also found that serious delinquencies continued to spiral to record levels in the fourth quarter.
We will see if the Obama Making Home Affordable Plan indeed provides aid to 7M-9M homeowners and prevents at least most of them from entering the foreclosure process. There are reasons to think that it will work, and reasons to think that it will not.

Rebecca Wilder


  1. Rebecca,

    What great economic forensics. Well done.!

    Looking at the first chart "Delinquency Rates Surging", we can see that rates spiked (as you show) at 6.07 as the economy transitioned from Big Union Manufacturing during the dismal Carter to Reagan 1 days.

    From that peak, the delinquency rate fell to around what seems to be a long-run rate of 4.5%.

    We see a spike up from the Dot Bomb and 9/11 days only to fall quickly back to around that 4.5%.

    The next big surge happens from the Housing Bubble moment (January 2006).

    I suggest that in any year, a total count of mortgages of all values can get made by all banks for which the economy can support and at which banks have willingness to take some losses.

    Call this the "natural delinquency rate", the 4.5%.

    Yet, when the total count of mortgages goes beyond some number, the economy cannot support an increase in mortgages.

    It would be great to look at these numbers along with household formation and renter eviction rates.

    In short, perhaps an exact number of formed households can get sustained by the total number of economic transactions beyond which renter eviction or mortgage delinquency rises.

    Do you know of any Academician Economists who have ever thought of doing research in this area?

    May I have your thoughts please, especially on the suggested thesis.

  2. Old data.

    If the money supply is controlled properly, the determination of interest rates can be left to the market forces, because the rate of inflation will be held down to tolerable levels. Monetary policy is not a cure-all.

    A clear distinction should be made between the temporary and the longer term effects of monetary policy on the level of interest rates. To hold down the Fed Funds rate (and other rates through this key rate), the Manager of the Open Market Account, (e.g., puts through buy orders for T-Bills or other eligible securities) sufficient to yield a net increase in member bank reserves and excess reserves.

    The Fed acquires these earning assets by creating new interbank (IOR) deposits in the Federal Reserve Banks--that is, by creating new legal reserves at the disposal of the member banks.

    Assume the buy order is for T-Bills. The effect is to bid up their prices, reduce their discounts (interest rates) and add to member bank legal and excess reserves. The expansion of loanable "federal" funds thereby pegging or retarding the increase in the Fed Funds rate. But the longer term effects of these operations are to fuel the fires of inflation.

    An understanding of these temporary and longer term effects reveals why the tight money policy initiated in Fed 2006 (by Bernanke) brought about a continued upsurge in interest rates.

    But it had the longer term effect of bringing inflation and interest rates down, while the easy money policy inititated in Sept 2007 provided a temporary impetus to the decline in interest rates.

    That is where we are now.

    A resurgence in inflation expectations will increase the inflation premium in long-term rates (thus reducing the supply of long-term loan funds in the schedule sense (i.e., lenders are only willing to loan any given amount at higher rates).

    At the same time the mammoth deficits keep the demand for loan-funds at high levels. This mix of forces probably will result in lower real rates at the same time that nominal rates are rising.

  3. Hi Smack,

    No, I do not know of any studies - this is far from my area of expertise. However, nice catch! There does seem to be a nice mean-reverting trend here.