More data on mortgage delinquency and downpayments
Last month, in a post headlined “how the mortgage industry lies with statistics,” I bemoaned the fact that I couldn’t find good real data to compare to the massaged data which went into this chart.
What this chart purports to show is that if you’re writing qualified mortgages, the default rate is low whatever the downpayment; it’s the non-qualified mortgages which see enormous default rates above 15%.
But now Glenn Costello of the Kroll Bond Rating Agency has taken the same data from CoreLogic and crunched it for me in exactly the way I requested of Anthony Guarino, the man who put the above chart together. And if you look at the data in a non-massaged way, it looks very different indeed:
The first thing to note is that all of the bars on this chart apply to qualified mortgages: the unqualified ones aren’t even included. And yet the y axis goes much higher than the official mortgage industry’s chart — one of the bars reaches a whopping 40%, about which more in a minute.
The greenish bars, on this chart, are all the mortgages with downpayments of 20% or more, broken down into three groups: downpayments of 20-25%; 25-30%; and more than 30%. (The chart actually shows LTV, or loan-to-value, which is the opposite of a downpayment: to get the downpayment, you subtract the LTV from 100.)
The worst performance for this group happened in 2006, for mortgages with a 20-25% downpayment: they ended up with a delinquency rate of 10.3%. That’s very high, and that single datapoint alone would suffice to show that the 20% downpayment level isn’t a guarantee of safety when it comes to mortgages.
But just look what happens when you compare the mortgages with a 20-25% downpayment to the mortgages with a 15-20% downpayment. Now we’re looking at the bluish bars — they range from 15-20% downpayments all the way to 3-5% downpayments. But for the time being, just look at the lightest blue bar and compare it to the darkest green bar. That’s where the 20% downpayment dividing line happens, and the difference is stark.
In 2002, 6.6% of mortgages with a 15-20% downpayment ended up in delinquency, compared to just 1.5% of mortgages with a 20-25% downpayment. That’s an increase of 340%. In 2003, the numbers are 5.7% and 1.8%; in 2004 they’re 8.0% and 3.5%; in 2005 they’re 13.3% and 8.3%; in 2006 they’re 21.2% and 10.3%; and in 2007 they’re 15.7% and 6.4%. In every case, the gap is huge; in 2006, it’s in double digits.
Remember, we’re talking about qualified mortgages here — the ones the mortgage industry claims are so safe that banks should be allowed to sell all of them off without keeping any skin in the game. All of these mortgages came with mortgage insurance, for instance. And now check out that tall bar from 2007: if you took out a qualified mortgage, that year, with a downpayment of between 3% and 5%, then you had a 40% chance of ending up in delinquency. There was clearly nothing safe about those mortgages at all; even the mortgages with no money down at all did better. (The final maroon bar shows mortgages with 0-3% down.)
The contrast with the official chart could hardly be starker. Let’s look at 2007. According to the mortgage industry, the worst performance seen in the qualified-mortgage universe was a delinquency rate of 6.3%, for loans with 5% or more in downpayment. The truth is that loans with 5-10% down in 2007 saw a delinquency rate of 25%. And you have to get up to a downpayment of 25-30% before you see a delinquency rate of less than 6.3%.
So let’s all remember this chart, the next time anybody claims that you can have a safe mortgage with a low downpayment. Because the fact is that you can’t.