More data on mortgage delinquency and downpayments

By Felix Salmon
July 12, 2011
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.

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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.

lobbychart.jpg

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:

dlinqneyc.png

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.

13 comments

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Any idea why the purple bars (highest LTV) are so much lower? Is this a result of lenders exerting more effort to monitor their riskiest loans, or maybe screening only the highest quality borrowers into that group.

Is there something else going on?

Posted by nmph | Report as abusive

how do you define “qualified mortgages”? are these only full doc? there was a lot of underwriting and underwriter fraud going on in 2006. and the use of a 20% down payment as an incentive not to default is dramatically undermined by funding it with another mortgage (2nd lien/silent second/pmi).

Posted by qwerty21 | Report as abusive

@qwerty21, you are missing the point here. The two graphs come from the same set of data with only one definition of “qualified”. The lobby graph shows very low default rates for all classes of “qualified” mortgages, whereas the Kroll graph shows very high rates for high LTV mortgages. It isn’t difficult to see how these results can be reconciled. The lobby LTV categories have only upper bounds: the “>= 5% down” category includes all mortgages with 99% down, all with 98%, down, and so on. One can infer that whatever ingredients went into the “qualified” stew, LTV played a dominant role. In other words, there just weren’t enough qualified high-LTV mortgages to materially affect the statistics once they were lumped in with the low-LTV ones.

Posted by Greycap | Report as abusive

“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.”

Many of those loans were underwater within a few years, as the market plunged 30% or more… A 20% downpayment is much safer when there aren’t also millions of RISKIER loans being written at the same time. The riskiest loans soured first. That brought down the market (and economy), causing a cascade across the whole spectrum.

Easiest place to break a cascade is at the start. Eliminate unqualified loans, eliminate low-LTV loans, and the rest would be in much better shape.

Posted by TFF | Report as abusive

Something seems wrong. Why the discontinuity between 20% down and 15% down, while 20-25% and 10-15% show a much smaller difference? That is, the data seems to jump between 20% and 15%. This suggests that 20% is some “magic number”, but that doesn’t make logical sense – the results should be more continuous.

Also, as the first poster noted, the people with no money down performed better than those with 3% down? That is totally illogical.

These results seem to suggest that something other than LTV is influencing the results, which I believe is part of the argument against strict downpayment rules for QRM.

In other words, the chart seems to argue against your conclusion that can’t have a safe mortgage with a low downpayment. In fact, it appears that qualifying criteria beyond downpayment can influence performance, suggesting that, given proper underwriting criteria, you CAN have safe mortgages with low downpayments.

Posted by publius5432 | Report as abusive

I applaud your ability to attract data and charts.

Posted by sanchk | Report as abusive

@publius5432 huh? Ok look at it it differently then. If you take the last 2 figures, which are 0-3 and 3-5 and add them together to be 5% ( which is the difference between the other percentages down as well) then you get over 50% default rate.

Posted by hsvkitty | Report as abusive

publius5432, i suspect that is a mix of two things. The chancers with 0% down got washed out in 2006 and that there were stricter underwriting with nothing down vs a little bit down.

Posted by Danny_Black | Report as abusive

“This suggests that 20% is some “magic number”, but that doesn’t make logical sense – the results should be more continuous.”

Isn’t 20% the number at which you (typically) don’t need PMI? Those with substantial assets will free up enough to meet that 20% down, but may prefer to keep the rest invested.

Posted by TFF | Report as abusive

Let’s make this really simple, and take the extreme case of 2007.

In 2007, loans with 0-3% down had a default rate 1/4 that of loans with a 3-5% down. All else equal, that doesn’t make sense – why would someone with no skin in the game perform 4X better than someone with some skin in the game?

Obviously, some other factor was at work. Maybe no money down mortgages had a higher average FICO score than 3% down mortgages. Maybe they had lower average DTIs. More reserves. Etc.

The point is, something caused these mortgages to perform 4X better. Whatever that is, could be applied to other low downpayment mortgages to help them perform well.

Thus, it is not true that you cannot have a safe mortgage with a low downpayment – that is an incorrect conclusion.

Posted by publius5432 | Report as abusive

“Thus, it is not true that you cannot have a safe mortgage with a low downpayment – that is an incorrect conclusion.”

Those 0-3% downpayment loans had a 5% to 20% default rate each and every year. That might be lower than the 3%-5% downpayment loans (isn’t 3% the lower limit for an FHA loan?), but it isn’t what I would call “safe”.

I agree with your conclusion that “other factors are at play” in creating this discontinuity. But your final line reaches beyond your evidence.

Posted by TFF | Report as abusive

What this really shows is a spike in defaults AT 80%. I bet you that loans with exactly 20% downpayment are lumped with 80-85% LTV and the 75-80% bucket only goes to 79%. That is just bad display of data.

Use the FHFA tables here: http://www.fhfa.gov/Default.aspx?Page=31 3

and make your own buckets.

People stretched to qualify as conforming and had unusually high defaults precisely at 80% LTV. This would be expected for whatever they set for the QRM too.

Posted by KPARKPLACE | Report as abusive

This is a rather illegitimate view of the data as lending can never be safe once unsafe lending has inflated asset prices beyond all value. Allow unqualified lending and even qualified lending is a rather meaningless term. The real question is, if only qualified lending were allowed, how overvalued might housing have gotten and the answer is not much, but allowing unqualified lending can always raise prices above any margin of safety, even 20%.

Posted by MyLord | Report as abusive