The delinquency rate measured 12 months after origination has improved dramatically on mortgages backed by Fannie Mae and Freddie Mac. According to the FHFA’s first quarter report on the enterprises, the 12-month delinquency rate is now back to 2002 levels even though the unemployment rate is significantly higher than it was in 2002 and price growth was stagnant until this spring.
Weak equity growth and high unemployment are the main drivers of delinquencies suggesting that the rates in 2002 and 2003 would have been much higher if similar home price and employment trends had been present. Likewise, the delinquency rate on loans financed by the FHA 12 months after origination has fallen dramatically since 2007. Then the 90-day delinquency rate on mortgages 12 months after origination was over 8 percent; in 2011 it was less than 2 percent.
The heads of all three banking regulators, the Federal Reserve, OCC, and the FDIC, have made comments alluding to the need for more relaxed lending standards that are in line with sound underwriting. The announcement by the FHFA that it intends to cap the time frame for reviews of problem loans on new originations may help to relax the put-back and reputation risk to lenders going forward, but risks to lenders from the rebuttable presumption stipulation of the qualified mortgage rule and risk weights on high LTV loans under Basel III could mitigate this effort.