Thursday, October 19, 2006

Homes in Hock

Moody's and Equifax reported that the percentage of home loans now delinquent has increased to 2.33% in the third quarter, up from a mere 0.30% in the fourth quarter of 2005. The study estimates that mortgage equity withdrawal is the driving factor for delinquencies in most metro areas. In other words, most delinquencies have been caused by over leveraging. Which really can be tied to weaker credit standards on the part of mortgage lenders. This article in the Wall Street Journal also mentions a survey by the OCC indicating that banks have generally been loosening credit standards over the last year.

I have been following a different data series on mortgage delinquencies, this one by the Mortgage Bankers Association. Its most recent release was from the 2nd quarter and showed 4.39% of loans were delinquent. I'm not sure what the methodology difference is between these two time series, but my suspicion is its either related to the definition of delinquent (i.e., 30 days past due, 90 days past due) or whether one survey is based on percentage of loans vs. percentage of dollars lent. I'm contacting the MBA to see what their methods are. Moody's is real bitchy about telling you anything without you paying for their services. Capitalist pigs.

Anyway, here is the chart on the MBA series. Doesn't look like much to worry about if you are an investor in consumer ABS.

The pink line is the long-term average. So one time series looks like delinquencies are rising and another looks like they are stable. Stay tuned.

One interesting note that is mentioned only briefly in the WSJ article: how much of delinquencies are made up of investors? I've got to think there are a lot of homes that were bought by amateur or professional flippers who have gone bust. That sort of delinquency is very different than regular Joe's delinquency. If I owned 5 properties and I go bust, then that's 5 delinquent loans, but only one person's consumption that is impacted. Just a thought.

UPDATE -- 2:56PM

Ruth Simon of the Wall Street Journal clued me in on one difference between these two studies. The took a sample of credit reports whereas the MBA asked member banks to report on delinquencies. I'm still not sure why one would be fundamentally different from the other, but they are.

As an aside, props to the WSJ writers. I've written a few of them over the years to ask questions about their articles and have always received prompt and informative responses. Having access to that kind of help is a significant asset for me, and a good reason why I subscribe to both the online and print versions.