It used to be that homeownership was a mark of stability, a factor that lenders took into account by opening their vaults a little wider to those who had mortgages. No more.
No more. There has been a dramatic rise in the delinquency of homeowners, especially those who took out adjustable rate mortgages after January 2005, according to a new research report that has implications for both lenders and consumers.
The report comes from Experian, one of the three major credit bureaus in the United States; it keeps files on the payment history of everyone who has borrowed. It mined that data in a report titled “Shifting consumer delinquency trends and the potential impact on lending policy.”
Among its key findings:
- Prime consumers (with VantageScore-brand credit scores of more than 700) with adjustable rate mortgages originated after the first quarter of 2005 have experienced a 286 percent increase in the rate of credit card delinquency.
- One out of four subprime adjustable-rate mortgages originated after the first quarter of 2005 is at 60 days past due.
- Of all mortgages originated after the first quarter of 2005 that entered foreclosure, more than 35 percent are in California.
Michele Raneri is the director of analytics for Experian, who presented the paper this week at a lenders’ conference. In an interview, she said the data show that old rules about who’s a risky borrower have been turned upside down.
For lenders, the changes mean “what they have known as experts is no longer true, so they need to re-evaluate and retest those things they have known,” she said.
Tipping point: 2005
Early 2005 was a tipping point, she said.
“Lending standards were getting looser before then, but that’s where the critical mass happened … The first quarter of 2005 is a pronounced separation.” The credit scores of people who got mortgages after that point are falling rapidly into some form of delinquency. It’s most pronounced among people who took out subprime adjustable-rate mortgages, but prime consumers are far from immune.
The study shows how the loose mortgage lending practices are now spilling over into other loans.
The credit card industry practices risk-based pricing — giving the best rates to those who pose the least risk of default. Once, mortgage holders, particularly prime consumers with good payment histories, were consistently those with the lowest default rates.
Now, the numbers are changing. Overall, the subprime credit card delinquency rates are still highest for people without a mortgage. But the numbers are converging. “The ‘no-mortgage’ population is the only population that’s decreasing in bank card delinquency,” Raneri said. If the trend continues for another quarter or two, people without mortgages will have lower credit card delinquency rates.
The study also showed that foreclosure is more common where home values shot up the fastest and consumers had to stretch their budgets furthest to buy homes during the housing bubble — namely, California and Florida.
California, which has 15 percent of the country’s mortgages originated since 2005, has a “staggering” 35 percent of all foreclosures.
Consumers are likely to see the types of offers for credit cards and other loans shift as lenders reassess the new patterns of risk.
“For consumers, the key is to do what you always knew you needed to do,” such as pay bills on time every time, Raneri said. “Keeping good credit keeps your choices open.”