What a difference a few years make. Back in 2007 and 2008, lenders were still willing to hand out high-risk mortgages, such as those with limited documentation or no money down (or both).
And they did so at a time when home prices were peaking in many parts of the country, which clearly made for a nasty outcome.
But once the mortgage crisis struck, underwriting guidelines tightened significantly, allowing only the most creditworthy borrowers to take out mortgages.
The evidence of that is now clear, thanks a new analysis from credit bureau TransUnion.
Earlier this month, the company noted that the Q1 2013 mortgage delinquency rate (60 or more days past due) fell 12% from the fourth quarter, and 21% year over year. That pushed the delinquency rate to 4.56%, which is still double the pre-crisis normal.
While this may have raised some eyebrows, seeing that credit card and auto loan delinquencies are around record lows, one needs to realize that it takes time to work things out.
Most of the Bad Mortgages Aren’t New
If you look at the chart above, you’ll notice that older vintages of mortgages have performed much worse than those originated over the past few years.
TransUnion noted that mortgages taken out before 2009 account for 50% of all outstanding mortgages, but 86% of the delinquencies.
And if you look at 2007 vintages in particular, you’ll notice that more than 20% have been delinquent at some time since origination, which is clearly awful.
Conversely, only 2.5% of mortgages made in 2010 have fallen into default over the past three years.
If we look at the 2011 and 2012 numbers, the trend only seems to be getting better, with very few delinquencies on newer vintages.
Additionally, the number of new delinquencies in the older vintages seems to be slowing down, as those who have ridden out the storm may have gotten through the worst of it.
And it if weren’t for the extremely long foreclosure timelines, TransUnion said the mortgage delinquency rate would have peaked in 2009 at about 3.05%, instead of 6.89%.
Meanwhile, the delinquency rate would stand at just 1.68% today, a number deemed “normal.”
The Mortgage Future Looks Bright
In other words, once that festering pool of bad mortgages finally works its way through the system, the residential mortgage market should be pretty pristine.
The big question now is determining the right level of underwriting to ensure those who should be able to obtain mortgages can, while also avoiding another crisis.
It gets a little murky if you look at the old numbers because home prices plummeted after many of those so-called bad mortgages were originated.
But what if prices hadn’t fallen so dramatically? Would many of those mortgages be current, or would the borrowers have been able to refinance again or sell their homes at a profit?
I’m sure plenty of high-quality mortgages went into (strategic) default thanks to the home price drop alone, though at the same time, the prevalence of option arms and other subprime offerings didn’t help matters.
Today’s mortgage quality is also skewed, albeit in a completely different direction – thanks to the ultra low mortgage rates available, it is much easier for borrowers to keep up with payments.
However, we all know mortgage rates will climb in the not-so-distant future, and so banks and lenders must be careful not to take on too much risk prematurely.
As both rates and home prices rise, mortgage payments will become less affordable, and that could usher in a new era of dodgy mortgage products to increase affordability.
We should be extremely careful not to allow that to happen again, especially when the mortgage pool finally looks so unspoiled.
Read more: Will high quality mortgages prevent another bubble?