Magazine article Mortgage Banking

Beware of Picture-Frame Thinking

Magazine article Mortgage Banking

Beware of Picture-Frame Thinking

Article excerpt

With more than three years of dramatically negative mortgage credit performance, all market observers are keenly interested in identifying signs that may indicate an improving or at least stabilizing market. Measures of the speed and magnitude with which loans progress through delinquency and ultimately foreclosure--known as delinquency roll rates--appear to show signs of stabilizing over the past year.

This good news, however, needs to be strongly tempered by the fact that these recent levels of stabilization are well above normal market levels as defined by performance over the last 15 years.

For example, over the course of 2009, an average of 45 percent of loans that were 60 days late rolled to a 90-day-late status, month-over-month. This is 50 percent higher than the average 60-to 90-day roll rate from 1995-2006.

In the current difficult market, analysts and market observers need to beware the tendency to develop "picture-frame" thinking. That is, a tendency to limit one's perspective to too short a historical context when making determinations about market trends.

When the mortgage market's credit problems are viewed in a longer-term historical context, a stark reality presents itself in terms of the amount of problem-loan resolution activity needed to return to historically normal delinquency and foreclosure inventories.

For this column, we studied mortgage performance in terms of delinquency, roll rates and foreclosures from January 1995 through December 2009, and defined our view of "normal" aggregate market performance as that experienced during the period of 1995 through 2006. (While loans originated in 2006 are well known to be poor performers relative to previous vintages, the impact of the 2006 vintage's performance did not register materially on the overall trends of the market until 2007.)

We feel the perspective offered here will put the magnitude of recovery needed in the proper context of what a stable and healthy housing market looks like.

During the period of 1995 through 2006, the aggregate universe of first-mortgage loans averaged 4.8 percent non-current (behind at least one payment or in the process of foreclosure), which includes an average of 0.52 percent in the process of foreclosure. During the same time frame, the maximum non-current rate was 5. …

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