An Ominous Jump in Delinquent Mortgages Black Knight Financial Services used to be LPS. The name was changed after the sale to Fidelity. Image via housingwire.com For non-paying customers, BK offers a “first look” into the state of mortgage markets. I pay specific attention to one piece of data, namely the “total US loan ...
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An Ominous Jump in Delinquent Mortgages
Black Knight Financial Services used to be LPS. The name was changed after the sale to Fidelity.
Image via housingwire.com
For non-paying customers, BK offers a “first look” into the state of mortgage markets. I pay specific attention to one piece of data, namely the “total US loan delinquency rate (loans 30 or more days past due, but not in foreclosure)“.
In January 2016, 30 days past due mortgages increased by 167,000 properties, or 6.6%, from the previous month. This data reflects the earliest stage of non-payment and is not molested by Government intervention, nor seasonally adjusted.
We heard real estate bulls, or novices like Ms. Yellen, mouth the mantra that real estate lending is unreasonably tight. If defaults reverse course in the next few months, it can only suggests that real estate lending has not been tight enough.
Think of the various reasons why borrowers may default, in no particular order of importance:
Mortgage rate too high? Nope, mortgage rates have been low and declining during the last few years.
Sudden reset? Nope, there are no special events that would have set off triggers that result in higher payments.
Default rate coming off historical lows? Nope, still correcting positively from the sub-prime wave of defaults. Current default rates are still considered high compared to historical norms before the sub-prime era.
Employment interruption? Nope, the BLS is telling us that the unemployment rate is declining. In fact, an unemployment rate of less than 5% is well below what is commonly regarded as “full employment” levels.
Property values declining? Nope, according to Case-Shiller, property values have been climbing steadily for several years now. Those who cannot make mortgage payments should be able to sell their way out of trouble.
Conclusion – The Situation is not as Rosy as it Appears
There are no reasons why defaults should be rising unless the underlying conditions are not as rosy as they superficially appear. How many households are running on empty with no reserves to cover rainy day expenses? If the default rate before foreclosure settles above 5% and starts to inch up, is that a sustainable model? Will it start putting pressure on Freddie Mac and Fannie Mae?
In conclusion, the past due data represent a leading indicator. Just by keeping an eye on the monthly Black Knight “first look” releases, we should have a heads up on trends in the real estate market months down the road.
Charts and tables by: Black Knight, Standard & Poors