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Volume 1

Issue 2

September 1997

MORTGAGE DELINQUENCY RATES

 FOR PORTFOLIO LENDERS

Some Factors to Consider

Research & Analysis

Office of Thrift Supervision

Washington, DC
Mortgage Market Trends Volume 1 Issue 2

Research & Analysis 1 September 1997

INTRODUCTION

Thrifts are home mortgage specialists. Yet thrifts have a higher rate of seriously

delinquent mortgages than the 23 million mortgages tracked by the Mortgage

Information Corporation (MIC). As of March 1997, 1.11% of home mortgages

held by thrifts are more than 90 days past due or in default. Only 1% of the

mortgages in the MIC database are seriously delinquent. This second issue of

Mortgage Market Trends examines some of the reasons why thrifts have, and are

likely to continue to have, higher mortgage delinquency rates than the MIC

national average, and whether this should be a cause for concern.

The mortgage market has changed dramatically over the last decade. As recently

as 1988, the thrift industry originated almost half of all home mortgages. The

rapid expansion of government-sponsored enterprises (GSEs -- Fannie Mae and

Freddie Mac), and the development of secondary markets for home mortgage

loan pools have enabled mortgage originators to sell their mortgages as soon as

they are closed. In other words, mortgage originators no longer have to hold the

loans they make. This separation of functions has had a profound effect on the

mortgage market. Mortgage companies, which tend to originate but not hold

mortgages, now dominate the origination market.

The sale and securitization of mortgages depend on predictable cashflows

generated from pools of homogeneous loans – loans similar in terms,

characteristics, and risks. As a result, only a portion of home mortgages is readily

saleable – primarily plain vanilla thirty-year, fixed rate, conforming (to the

specifications set by the GSEs) mortgages. These low-risk mortgages dominate

the portfolios held by the GSEs and represent a large majority of the mortgages

tracked by MIC.

Thrifts and banks, as portfolio lenders, are not restricted to low-risk mortgages

that can easily be sold into the secondary market. They can originate adjustablerate mortgages (ARMs), jumbo mortgages (those over the conforming loan limit

set by Fannie Mae and Freddie Mac, currently $214,600), and special program

loans, among others. In this issue, we will explore how the characteristics of the

mortgage portfolios held by FDIC-insured institutions (depositories), especially

adjustable-rate mortgages, affect their current credit risk exposure, with an

emphasis on thrifts.

CURRENT MORTGAGE MARKET CONDITIONS

Market Share Changes

Portfolio lenders have been an important segment of the mortgage market.

However, the continuing rapid consolidation in the banking industry has changed

the relative market shares of banks and thrifts. The second quarter of 1997

witnessed the largest transfer of thrift assets (FDIC-supervised Savings Banks
Mortgage Market Trends Volume 1 Issue 2

Research & Analysis 2 September 1997

and OTS-regulated thrifts) to the commercial banking sector ever. The thrift

industry lost 34 institutions, declining to a total of 1,852 institutions, 1272 of

which were OTS-regulated. During the quarter, commercial banks acquired 18

thrifts with assets of $10.5 billion. Eleven thrifts, with $9.8 billion in assets,

converted to commercial bank charters. Five thrifts were acquired by other

thrifts. Since the August 1996 tax law change concerning bad-debt reserves, 81

thrifts with almost $55 billion in assets have migrated to the commercial banking

industry.

Given the ongoing consolidation of the industry, it is no surprise that the thrift

industry continues to lose mortgage market share. Table 1 reports data on

mortgage loan originations from HUD’s Survey of Mortgage Lending Activity

(SMLA). In March 1997, the thrift industry’s market share of single-family

residential mortgages fell from 18.8% at year-end 1996 to 17.3% at the end of the

first quarter 1997. Both mutual savings banks (4.2% to 3.2%) and savings & loan

associations (14.6% to 14.1%) suffered declines in their market shares. In

contrast, commercial banks enjoyed a substantial increase in market share, rising

to 27.2% in March 1997 from 24.6% at year-end 1996. This may reflect, in part,

commercial bank acquisitions of thrifts and their assets. The market share for

mortgage banks fell slightly to 54.8%. Nonetheless, FDIC-insured portfolio

lenders (banks and thrifts) still have more than 45% of the mortgage origination

market.

Current Mortgage Rates and Terms

While the SMLA shows market share, it does not show what types of mortgages

are being made. The Federal Housing Finance Board conducts its Mortgage Interest

Rate Survey (MIRS) monthly among mortgage lenders on the interest rates and

terms of their recently closed mortgages. Table 2 reports the survey results for

the months ending each quarter over the last year.

Table 2 shows that, for all three lender groups, the effective interest rates (which

include the amortization of initial fees and charges over a ten-year period) on

mortgages declined sharply in December 1996, only to rise over the first two

quarters of this year. For S&Ls, the current average is 7.22%, for commercial

banks, 7.86%, and for mortgage companies, 8.03%. The average effective interest

rate was substantially lower for S&Ls than that for the commercial banks and

mortgage companies in every month surveyed.

Table 1: Mortgage Origination Market Share

Year CB Share SB Share S&L Share MC Share Total

1996 Q1 $43166 22.2% $6766 3.5% $28394 14.6% $114557 59.0% $194196

Q2 45927 22.0% 9120 4.4% 35064 16.8% 117583 56.2% 209140

Q3 42327 22.2% 9979 5.2% 30362 15.9% 106637 55.9% 190722

Q4 47128 24.6% 8036 4.2% 27895 14.6% 106962 55.9% 191271

1997 Q1 48116 27.2% 5651 3.2% 24953 14.1% 96969 54.8% 176877

Source: Survey of Mortgage Lending Activity, HUD

CB, Commercial Banks; SB, Savings Banks; S&L, OTS thrifts; MC, Mortgage Companies
Mortgage Market Trends Volume 1 Issue 2

Research & Analysis 3 September 1997

The data in Table 2 suggest two reasons for the lower effective interest rate on

mortgages originated by S&Ls – ARMs and loan-to-value (LTV) ratios.

Averaging the four monthly percentages reported in Table 2, more than half

(53%) of the mortgages originated by S&Ls were adjustable rate mortgages, while

for commercial banks it was 32%, and for mortgage companies only 16%. ARMs

are mortgages where the borrower, rather than the lender, bears more interest

rate risk. They typically carry a lower contract interest rate than fixed-rate

mortgages, and thus a higher percentage of ARM originations by S&Ls would

result in a lower average effective interest rate for S&Ls.

The distribution of originations by loan-to-value ratio categories also might affect

differences in the effective interest rates between S&Ls and commercial banks

and mortgage companies. Again using the averages of the four monthly

percentages, S&Ls have a much smaller percentage of their loans in the highest

LTV category (greater than 90% LTV ratio) than the two others -- 17% for S&Ls

vs. 24% for commercial banks and 28% for mortgage companies. Higher LTVratio loans are riskier and should carry a higher rate and/or more fees and

charges than lower LTV-ratio loans. The lower percentage of high LTV-ratio

mortgages originated by S&Ls is offset primarily by the higher percentage of

their mortgages in the 70-to-80% LTV category than for the commercial banks

or mortgage companies.

Table 2: Mortgage Rates and Terms

These two factors, the percentage of ARMs and LTV-ratio distribution, likely

affect the performance of the mortgage portfolios held by S&Ls and commercial

banks. Before pursuing this, we first present an overview of current national

delinquency trends.

Month Effective Rate Percent of Loans by LTV Class % Arms

< 70% 70-80 80-90 > 90%

S&Ls

Sep-96 7.43 23 42 18 18 59

Dec-96 7.16 21 46 16 17 52

Mar-97 7.34 21 47 16 16 46

Jun-97 7.22 22 45 16 17 56

Commercial Banks

Sep-96 7.84 25 42 12 21 44

Dec-96 7.65 22 28 20 30 32

Mar-97 7.77 20 39 19 22 31

Jun-97 7.86 21 38 18 22 21

Mortgage Companies

Sep-96 8.15 20 34 19 27 19

Dec-96 7.76 21 36 16 27 15

Mar-97 7.92 19 34 17 30 14

Jun-97 8.03 18 36 17 28 16

Source: Mortgage Interest Rate Survey, Federal Housing Finance Board
Mortgage Market Trends Volume 1 Issue 2

Research & Analysis 4 September 1997

NATIONAL DELINQUENCY RATES RISE SLIGHTLY

Figure 1 plots the percentage of seriously delinquent (90 days past-due or in

foreclosure) residential mortgages, using both the MIC and Thrift Financial

Report (TFR) data. Since the first issue of the Mortgage Market Trends, we have

divided the MIC data into two categories: the market , which includes all twentysix MIC participants, and a subgroup, the depository institutions, which includes

only the FDIC-insured MIC participants (a mix of both S&Ls and commercial

banks). As the trend lines in Figure 1 show, the national delinquency rate

increased slightly in the first quarter of 1997. In contrast, both the MIC

depository and OTS-regulated (TFR) thrift delinquency rates fell slightly. The

TFR rate excludes one thrift that specializes in delinquent loans. Figure 1 also

shows that thrifts, as well as depositories, have higher delinquency rates than the

national average for the entire historical period.

Figure 1: Percentage of Seriously Delinquent Mortgages

0

0.5

1

1.5

2

2.5

Mar-93Jun-93Sep-93Dec-93Mar-94Jun-94Sep-94Dec-94Mar-95Jun-95Sep-95Dec-95Mar-96Jun-96Sep-96Dec-96Mar-97

Depositories

TFR

MIC

Source: MIC and TFR. MIC contains the combined data of the depository and non-depository

participants in MIC’s Loan Performance System. Depositories comprise both bank and thrift MIC

participants. The thrift MIC participants are very large institutions located primarily on the East

and West coasts. TFR represents all OTS-regulated institutions. Because of their size and

location, the performance of MIC thrift participants differs significantly from the average OTSregulated thrift.

RISK FACTORS

Loan-to-Value Ratios

Mortgage delinquency rates might differ among groups of lenders for several

reasons. The lenders may have different underwriting standards and skills. They

also may hold different portfolios. As a result, the risk characteristics of the loan

portfolios could differ substantially, resulting in sharply different credit risk and

thus, delinquency rates. Such characteristics as the LTV ratio, product type (ARM
Mortgage Market Trends Volume 1 Issue 2

Research & Analysis 5 September 1997

vs. fixed-rate), loan size (conforming vs. non-conforming), loan vintage, and

location of the property securing the mortgage (e.g., a concentration in areas with

slow growing or falling real estate prices) could vary substantially for each group.

As these factors vary, so will the performance of the loan portfolio over time.

It has been well documented that the LTV ratio explains more of the variation in

delinquency rates than any other factor. Delinquencies increase sharply as the

LTV ratio goes up, especially after it reaches 95%. As shown in the first issue of

Mortgage Market Trends, high LTV-ratio mortgages have delinquency rates more

than sixteen times greater than low LTV-ratio mortgages (less than 60% LTV

ratios). The higher delinquency rates for depositories might reflect a higher

average LTV.

While the loan-to-value ratio at the time of the mortgage origination is a useful

indicator of credit risk exposure, the actual LTV ratio, based on the current

market value of the home, most heavily influences the default decision. Current

market LTV ratios are not usually available. The home price appreciation index

(shown on the first table in the attached appendix) calculated by the Office of

Federal Housing Finance Enterprise Oversight (OFHEO) provides useful

additional information. The correlation coefficient between the rate of seriously

delinquent mortgages for depositories and the three-year price appreciation rate

on a state-by-state basis is a surprisingly large -0.74. In other words, strong home

price appreciation is associated with low delinquency rates and vice versa. This

suggests that local real estate market information is critical in the assessment of

credit risk exposure.

Adjustable-Rate Mortgages

Along with LTV ratio, mortgage product type affects credit risk, with ARMs

being more risky than fixed-rate mortgages. The MIRS data show that ARM

originations vary from about a quarter to a third of all originations. Yet,

according to recent Consolidated Maturity/Rate Schedule fillings, 66% of thrift

mortgage portfolios are ARMs. Thrift ARM holdings are about evenly split

between COFI ARMs and other types of ARMs, primarily constant maturity

Treasury (CMT) ARMs.

Figure 2: Percentage Seriously Delinquent – Adjustable vs. Fixed Rate

0

0.5

1

1.5

2

2.5

1991 1992 1993 1994 1995 1996

Adjustable

Fixed

Source: MIC
Mortgage Market Trends Volume 1 Issue 2

Research & Analysis 6 September 1997

As Figure 2 shows, variable-rate mortgages have higher delinquency rates than

fixed-rate mortgages, often more than twice as high. Adjustable-rate mortgages

have principal and interest payments that change because the underlying interest

rate index on which they are based changes. If the interest rate index has risen by

the time payments are reset, borrowers face payment shock, the primary

additional risk of ARMs. For a variety of reasons, borrowers may not be able to

change their spending habits to adjust to the higher level of payments now

required. Payment shock increases the risk of adjustable-rate mortgages.

All else being equal, the willingness of the adjustable-rate borrower to bear the

risk of payment shock due to possible interest rate changes suggests that he/she

is less risk averse than the fixed-rate borrower. The choice of an adjustable-rate

mortgage may also indicate that such a borrower has a shorter time horizon, as

lower payments are likelier to occur earlier in the life of an ARM, making them

more attractive to those who might be more transient. Such factors can affect

the credit risk of adjustable-rate mortgages.

Popular interest rate indices include the 11th District Cost of Funds Index

(COFI), 1 year constant maturity Treasury index, and the six-month London

Interbank Offered Rate (LIBOR). As payment shock is the primary additional

risk of adjustable-rate mortgages, the volatility of these indices will affect their

risk. Figure 3 shows how the indices have changed over the last four years. The

11th District COFI has the least volatility, as it is a weighted average of the cost of

funds of various maturities, some of which may be considerably longer than six

months or a year.

Figure 3: Adjustable-Rate Mortgage Indices

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

Jan-93 Jan-94 Jan-95 Jan-96 Jan-97

COFI

LIBOR

1 YR Treasury

The standard deviation, a common measure of volatility, of the COFI index over

this time period was 0.5, whereas for the six month LIBOR and 1 year constant

maturity Treasury (CMT) indices, the standard deviations were more than twice

as large, 1.08 and 1.09. While the lower volatility of the COFI index would

suggest that ARMs based on it would have fewer large payment shocks, those
Mortgage Market Trends Volume 1 Issue 2

Research & Analysis 7 September 1997

that occur tend to persist longer than for the other indices, leaving the relative

payment shock risk for COFI ARMs ambiguous.

Note that since March 1995, all three indices, especially the COFI index, have

been relatively constant. Since March 1995, the standard deviation of the COFI

index has fallen by more than two-thirds, to 0.135; for the 1 year CMT, to 0.30,

and for LIBOR, to 0.26. This recent calm period has resulted in fewer payment

shocks, and thus should have led to lower delinquencies for ARMs.

Flat interest rates should also lower delinquencies relative to a rising interest rate

environment, as the LTV ratios of ARMs that permit negative amortization

would be lower than otherwise. Negative amortization occurs when the interest

due is greater than the interest paid. The difference is added to the principal

amount of the loan. Such can be the case in those ARM contracts that have a cap

on the payment adjustment but not on the interest rate adjustment, or when the

interest rate adjustment and the payment adjustment are on different schedules.

Thus, flat interest rates should have resulted in lower delinquencies. However, as

Figure 2 shows, such has not been the case. In the next section, we consider in

more detail differences in the portfolio composition that may explain the

seemingly anomalous result.

PORTFOLIO COMPOSITION DIFFERENCES

As was discussed in the introduction, depositories are likely to hold mortgage

portfolios that differ from the mortgage pools that are sold into the secondary

market. Table 3 reports the percentage breakdown by product type of the two

mortgage portfolios tracked by MIC, the depository subgroup and all

participants, based on the mortgages held in March 1997. The reported

percentages are based on the dollar value of residential loans held in the

portfolios and may not sum to 100% due to rounding and incomplete data.

Table 3: Portfolio Composition (%’s) – Fixed vs. Variable

Northeast Southeast Central Midwest West National

Terms Market Depos. Market Depos. Market Depos. Market Depos. Market Depos. Market Depos.

Fixed 15 20.05 16.37 18.06 14.40 25.00 17.52 20.91 17.25 12.21 9.40 18.00 13.27

Fixed 30 61.42 55.16 60.08 56.29 56.57 56.14 64.27 62.78 50.47 40.06 56.76 50.00

Variable 15.78 26.43 17.97 28.16 11.26 23.71 11.10 19.22 32.15 48.42 20.83 34.86

Balloon 1.79 1.44 3.15 1.04 5.84 2.44 2.75 0.98 4.19 1.29 3.63 1.39

Neg. Am 1.93 4.03 2.72 5.51 1.25 3.83 1.57 3.00 11.99 19.26 5.46 10.57

No Neg. 15.73 25.98 17.11 22.74 11.60 20.00 10.83 16.15 21.30 29.91 16.68 25.30

T Bill 12.62 19.85 13.53 18.78 9.27 17.14 8.32 13.44 12.09 17.19 11.73 17.50

COFI 1.35 2.75 2.34 4.75 1.17 3.60 1.39 2.81 12.44 20.01 5.39 10.45

Source: MIC

Several observations can be drawn based on the information presented in Table

3. First, the proportion of variable-rate mortgages held by depositories (35%) is

almost twice as large as it is for the market. Variable-rate mortgages have

substantially higher delinquency rates than fixed-rate mortgages. As discussed
Mortgage Market Trends Volume 1 Issue 2

Research & Analysis 8 September 1997

earlier, variable-rate mortgages accounted for 66% of the mortgage loans held by

thrifts in their portfolios in March 1997. This percentage is almost twice as large

as the percentage of variable-rate mortgages held by depositories in the MIC

data.

ARMs are most popular in the West Region, where almost half (48.4%) of the

mortgages held by depositories have variable rates. Nineteen percent of the

depository West region mortgages can negatively amortize. These products are

the riskiest of the ARMs.

In the Central Region, the ARM portion for depositories (23.71%) is more than

double that of the market as a whole (11.26%). The actual difference between

depositories and non-depositories is even much larger, as the market percentage

represents the combined total of both the depositories and the non-depositories.

The data is Table 3 also show that the T-bill ARMs are much more prevalent (4

to 9 times higher) in all regions of the country except for the West Region, where

COFI ARMs are just slightly more popular.

Table 4: Portfolio Composition by LTV Ratio

Northeast Southeast Central Midwest West National

Market Depos. Market Depos. Market Depos. Market Depos. Market Depos. Market Depos.

LTV

20-60 18.91 16.58 12.05 10.22 15.84 11.38 10.02 8.51 17.36 15.05 15.65 13.33

61-70 14.35 13.75 11.37 10.31 14.03 11.23 10.73 9.30 14.48 13.96 13.47 12.45

71-75 14.21 14.32 12.00 10.88 14.96 11.74 11.34 9.70 14.62 13.92 13.83 12.74

76-80 22.01 22.70 21.14 20.25 21.97 19.98 22.00 19.67 24.56 26.40 22.57 23.21

81-90 15.96 15.66 16.47 15.06 15.52 15.65 17.22 15.57 14.24 14.31 15.78 14.97

91-95 7.76 6.27 11.75 10.06 9.32 9.20 13.02 10.73 6.19 5.25 8.37 7.33

96-105 3.51 5.92 10.13 16.73 5.54 14.58 9.49 16.92 5.09 6.81 6.48 10.35

Source: MIC

Table 4 shows the breakdown in portfolio percentages by LTV ratio.

Depositories hold a higher proportion of high LTV-ratio (over 95%) mortgages

across all five regions. Depositories carry more ARMs and high LTV mortgages

than the market. This has resulted in more seriously delinquent mortgages for

them. As of the end of March 1997, depositories had a 1.39% seriously

delinquent rate, 1.00% for the market.

In the Central Region, depositories, relative to the market, hold more ARMs and

more high LTV-ratio mortgages than they do in the other regions. Consistent

with this higher relative risk profile, the seriously delinquent rate for the Central

region for depositories, at 1.00%, is twice the Central region delinquency rate for

the market, at 0.50%. The Regional and State Analysis table in the Appendix

contains more detail on regional and state level delinquency rates.
Mortgage Market Trends Volume 1 Issue 2

Research & Analysis 9 September 1997

Table 5: Portfolio Composition by Type

Northeast Southeast Central Midwest West National

Market Depos. Market Depos. Market Depos. Market Depos. Market Depos. Market Depos.

Type

Conv 93.98 90.30 83.73 74.29 91.33 77.67 83.52 71.66 92.51 90.17 89.80 83.89

VA 1.64 2.66 6.59 10.51 2.36 6.43 5.24 9.27 2.65 3.64 3.56 5.64

FHA 3.95 6.63 9.31 15.17 5.86 15.86 10.49 19.04 4.62 6.16 6.43 10.30

Source: MIC

Table 5 suggests that VA and FHA loans are a much larger presence in the

Southeast, Central, and Midwest regions, averaging about 25% of the depository

portfolios, than on either coasts, where they represent less than 10% of the

portfolios. VA and FHA mortgages have delinquency rates that are almost four

times higher than the rate for conventional mortgages (for March 1997, 3.06% of

the VA/FHA loans were seriously delinquent versus 0.77% of the conventional

mortgages).

Depositories’ holdings of VA and FHA loans have grown rapidly since 1994. In

December 1994, depositories’ VA/FHA holdings were 5.9% of their total

holdings (2.3% VA and 3.6% FHA). In March of 1997 their holdings were 15.9%

(5.6% VA and 10.3% FHA), an almost 170% increase. Of the two, the FHA

holdings showed the larger increase -- up 186%.

The FHA program has expanded so rapidly for a variety of reasons. In April

1994, the up-front premium dropped from 3% to 2.25%. In 1995, the maximum

FHA loan amount was raised substantially and indexed to the GSE conforming

loan limit. In 1996, the maximum loan amount was $155,250. FHA interest rates

have also become more competitive, especially for FHA adjustable-rate

mortgages. Between 1995 and 1996, FHA contract rates fell from 8.41% for 30

year fixed rate mortgages to 7.70%; for adjustable-rate mortgages, they fell an

even larger amount, from 7.21% to 6.27%.

The impact of changes in the VA/FHA programs can be seen in at least two

places. First, although VA and FHA mortgages represent only 15.9% of all

depository holdings, they represent 98.8% of the all depository holdings with

LTV ratios greater than 95%. Second, the FHA ARM program changes are

reflected in the increase in the variable-rate government-backed mortgages held

by depositories. In December 1993, 4.6% of the FHA/VA mortgages held by

depositories were adjustable rate. In December 1994, the percentage had risen to

7.2%. As of March 1997, more than 18.9% were adjustable rate, a four-fold

increase since the end of 1993. More than 60% of the FHA/VA mortgages have

LTV ratios greater than 95%. This mixture of high LTV loans and adjustable

rates create a credit risk profile that is greater than the sum of the two risk

components.

HIGH LTV-RATIO AND VARIABLE-RATE MORTGAGES

Mortgages with LTV ratios greater than 95% are substantially more risky than

lower LTV-ratio mortgages. Variable-rate mortgages are riskier than fixed-rate

mortgages because of payment shock induced by changes in the underlying
Mortgage Market Trends Volume 1 Issue 2

Research & Analysis 10 September 1997

index. The combination of the two risks exposes the lender to a higher level of

risk than just the sum of the two factors because of their possible interaction. If

jumps in interest rates are accompanied by an economic slowdown and/or

slower house price appreciation, a borrower may be faced with a sizeable

payment shock just when he or she may be unable (or unwilling) to absorb it.

As was illustrated in Figure 3, the common adjustable-rate indices have been

unusually flat (and relatively low) over the last two years, resulting in few ARM

payment shocks. Employment rates, economic growth, and home price

appreciation has been generally favorable over the same period. As a result, fewer

high LTV-ratio adjustable-rate mortgages have become delinquent. Such may not

be the case in the future, should interest rates spike and/or the economy soften.

CONCLUSION

In this issue, we have considered several factors that could account for the higher

than average delinquency rates among depositories and thrifts. As portfolio

lenders, they can and do hold portfolios different from the market as a whole.

Portfolios composed of mortgages with higher LTV ratios and more adjustablerates explain much of the differences between the depository delinquency rates

and those of the overall market. The large percentage of FHA/VA Treasury-bill

ARMs with high LTV loans appears to be another important factor.

What are the implications of this finding? The last two years have been an

extremely benign period for mortgage credit risk, with both low, stable interest

rates and generally rising home prices across the country. However, over the twoyear span, depositories have sharply increased their holding of mortgages that

combine adjustable rates and high LTV ratios. This combination makes such

mortgages highly risky. Should the economy experience an interest rate spike

accompanied by an economic slowdown, delinquencies and defaults on such

mortgages would likely soar.

Most of these mortgages are insured by the Federal government under the

FHA/VA programs, and thus pose much lower credit losses to the institutions

that hold them. Nonetheless, their presence may well lead to higher future overall

delinquency rates. Their presence also underscores for adjustable-rate mortgages

the little-made connection between interest rate risk and credit risk. While

adjustable-rate mortgages lower an institution’s interest rate risk, they do raise its

credit risk, especially for negatively amortizing and/or higher LTV-ratio

adjustable-rate loans, as borrowers shoulder interest rate risk as well as normal

credit risk.

Although OTS does not collect information on LTV, the TFR data show that the

thrift industry does have two-thirds of its mortgage portfolio in ARMs, equally

split between COFI and non-COFI ARMs. Some of the ARMs held by thrifts

can negatively amortize. This high concentration of ARMs suggests higher

delinquency rates for thrifts. Yet the MIRS data indicate that S&Ls, on average,

originate lower LTV mortgages than their competition. As a result, thrift
Mortgage Market Trends Volume 1 Issue 2

Research & Analysis 11 September 1997

delinquencies tend to run at a lower rate than the rate for the other depositories

reported by the MIC system, especially during the recent calm interest-rate

period.

As a final note, while adjustable-rate mortgages are riskier than fixed-rate

mortgages, loan-to-value remains the dominant determinant of credit risk. The

high correlation we found between home price appreciation and mortgage

delinquency rates emphasizes the importance of local real estate market

conditions in the determination of mortgage credit risk.
Mortgage Market Trends Volume 1 Issue 2

Research & Analysis 12 September 1997

Mortgage Market Trends

Volume 1 Issue 2

September 1997

Data Appendix

National and Regional Trends in Mortgage Delinquency Rates

as of March 31, 1997
Mortgage Market Trends Volume 1 Issue 2

Research & Analysis 13 September 1997

Regional and State Analysis

Seriously Delinquent & Home Price Appreciation Rates

(Based on $)

MIC SD Home Price Appreciation

Market Depositories TFR SD 96Q1-97Q1 94Q1-97Q1

National 1.00 1.39 1.11 3.19 10.74

Northeast 1.32 1.88 1.17

Connecticut 1.34 1.71 1.05 -0.01 -0.50

Delaware 0.76 1.02 1.31 1.33 3.23

Maine 0.72 1.40 0.98 -0.47 2.80

Massachusetts 0.78 1.15 0.57 3.13 8.29

New Hampshire 0.66 1.17 0.63 2.18 4.72

New Jersey 1.66 2.14 1.43 0.36 2.31

New York 1.70 2.22 1.43 0.49 1.68

Pennsylvania 1.07 1.51 0.75 0.54 4.28

Rhode Island 0.82 1.44 2.60 -1.52 -0.68

Vermont 0.52 1.14 1.06 0.17 3.98

West Virginia 0.34 0.88 0.77 4.24 14.52

Southeast 0.98 1.42 0.90

Alabama 0.54 1.07 0.76 4.18 14.11

DC 1.50 1.65 4.31 1.74 1.65

Florida 1.18 1.55 0.88 1.94 8.36

Georgia 0.77 1.20 0.70 4.28 12.61

Maryland 1.37 1.97 1.63 0.63 3.11

North Carolina 0.58 0.94 0.43 5.12 15.69

Puerto Rico 1.33 3.12 1.50 -.- -.-

South Carolina 0.67 1.03 0.49 4.03 12.33

Virginia 0.84 1.24 0.76 1.54 5.77

Central 0.50 1.00 0.88

Illinois 0.70 1.17 0.85 3.41 12.29

Indiana 0.44 1.00 0.71 5.71 16.98

Kentucky 0.38 0.73 0.58 5.04 16.90

Michigan 0.22 0.47 0.77 9.07 23.04

Ohio 0.50 1.02 0.55 5.42 16.47

Tennessee 0.78 1.35 0.52 5.19 17.49

Wisconsin 0.24 0.60 0.28 5.28 19.05

Midwest 0.52 0.79 0.82

Arkansas 0.58 1.36 0.60 3.69 14.05

Colorado 0.29 0.41 0.14 5.49 22.67

Iowa 0.23 0.37 0.52 4.37 16.32

Kansas 0.36 0.67 0.31 3.83 15.42

Louisiana 0.79 1.35 0.45 3.83 14.68

Minnesota 0.43 0.54 0.33 4.70 15.83

Mississippi 0.62 1.84 1.05 3.56 13.84

Missouri 0.35 0.69 2.18 5.34 15.36

Nebraska 0.21 0.37 0.67 4.69 17.35

New Mexico 0.44 0.64 0.69 2.87 17.12

North Dakota 0.25 0.29 0.85 3.39 15.47

Oklahoma 0.62 1.21 1.01 4.62 12.94

South Dakota 0.36 0.48 0.49 2.40 14.07

Texas 0.75 1.09 1.09 0.99 6.19

West 1.19 1.41 1.43

Alaska 0.41 0.84 - 2.18 11.85

Arizona 0.54 0.76 0.35 3.98 17.20

California 1.42 1.58 1.53 -0.87 -3.95

Hawaii 1.15 1.79 1.63 -7.03 -10.14

Idaho 0.47 0.79 0.30 4.26 18.89

Montana 0.45 0.64 0.17 5.00 21.19

Nevada 0.83 1.10 1.10 1.44 9.80

Oregon 0.25 0.33 0.60 8.42 27.95

Utah 0.37 0.68 0.74 7.86 33.03

Washington 0.52 0.75 0.36 2.64 11.11

Wyoming 0.28 0.35 0.39 2.79 18.56
Mortgage Market Trends Volume 1 Issue 2

Research & Analysis 14 September 1997

OTS Regions

Seriously Delinquent Mortgages (%)

Based on Thrift TFR Data by Location of Headquarters

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

Mar-93

Jun-93

Sep-93Dec-93

Mar-94

Jun-94

Sep-94Dec-94

Mar-95

Jun-95

Sep-95Dec-95

Mar-96

Jun-96

Sep-96Dec-96

Mar-97

National N E S E Central M idwest West

Home Price Appreciation

Yearly Rate

March 1996 to March 1997

(Source: OFHEO Resale Database)

Home Price Appreciation

1996Q1 to 1997Q1

5.1 to 9.1 (10)

4.2 to 5.1 (9)

2.9 to 4.2 (10)

1.3 to 2.9 (11)

-7.1 to 1.3 (11)
Mortgage Market Trends Volume 1 Issue 2

Research & Analysis 15 September 1997

National Cohort Performance by Vintage

(Source: MIC)

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

12 15 18 21 24

Seasoning (Months)

1995

 1994

1991

1992

1993

Home Purchase Vs. Refinancing Mortgages

(Source: MIC, Seriously Delinquent Rate)

Refinance

Purchase

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

199119921993199419951996

1997Q1

Fixed Vs. Variable Rate Mortgages

(Source: MIC, Seriously Delinquent Rate)

V a ria b le

F ixed

0.00

0.50

1.00

1.50

2.00

2.50

199119921993199419951996

1997Q1
Mortgage Market Trends Volume 1 Issue 2

Research & Analysis 16 September 1997

Northeast Region

Recent Developments

The delinquency rate for the market rose slightly in the Northeast Region between

December 1996 and March 1997. Over the same period, the delinquency rate for

depositories fell slightly. A small decline in the delinquency rate for thrifts was also evident.

At the state level, New York had the highest depository delinquency rate, while the lowest

rate was in West Virginia. The same was true for the market delinquency rates by state.

According to the April 1997 issue of the FDIC’s Survey of Real Estate Trends, improvements

in residential markets in the Northeast were substantial during the first quarter of 1997. In

particular, increases in both home sales and median home sales prices occurred during the

first quarter.

Northeast Region

Percent of Mortgages Seriously Delinquent

by Dollar Value

(Source: MIC, TFR)

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

Mar-93

Jun-93

Sep-93

Dec-93

Mar-94

Jun-94

Sep-94

Dec-94

Mar-95

Jun-95

Sep-95

Dec-95

Mar-96

Jun-96

Sep-96

Dec-96

Mar-97

Delinquency Rate (%)

Depositories

Thrifts

Market
Mortgage Market Trends Volume 1 Issue 2

Research & Analysis 17 September 1997

Southeast Region

Recent Developments

The delinquency rate for the market rose slightly in the Southeast Region between

December 1996 and March 1997. Over the same period, the delinquency rate for

depositories fell slightly as did the delinquency rate for thrifts. At the state level, Puerto Rico

had the highest depository delinquency rate, while the lowest rate was in North Carolina.

The market delinquency rate was highest in Maryland, while Alabama had the lowest market

delinquency rate.

A stagnant economy and growing unemployment have adversely impacted the Miami

economy this year, placing it at the top of the delinquency rankings. Even without the

economic problems, the large number of purchase loans and high loan-to-value ratios

contribute to much higher default risk on loans in the Miami area.

Southeast Region

Seriously Delinquent Rate

by Dollar Value

(Source: MIC, TFR)

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

Mar-93

Jun-93

Sep-93

Dec-93

Mar-94

Jun-94

Sep-94

Dec-94

Mar-95

Jun-95

Sep-95

Dec-95

Mar-96

Jun-96

Sep-96

Dec-96

Mar-97

Delinquency Rate (%)

Depositories

Thrifts

Market
Mortgage Market Trends Volume 1 Issue 2

Research & Analysis 18 September 1997

Central Region

Recent Developments

The delinquency rate for the market increased slightly in the Central Region between

December 1996 and March 1997, while the delinquency rate for depositories fell slightly.

Thrifts experienced a small decline in the delinquency rate. At the state level, Tennessee had

the highest depository delinquency rate, while the lowest rate was in Michigan. The same

was true for the market delinquency rates by state.

Central Region

Seriously Delinquent Rate

by Dollar Value

(Source: MIC, TFR)

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

Mar-93

Jun-93

Sep-93

Dec-93

Mar-94

Jun-94

Sep-94

Dec-94

Mar-95

Jun-95

Sep-95

Dec-95

Mar-96

Jun-96

Sep-96

Dec-96

Mar-97

Delinquency Rate (%)

Depositories

Thrifts

Market
Mortgage Market Trends Volume 1 Issue 2

Research & Analysis 19 September 1997

Midwest Region

Recent Developments

The delinquency rate for the market rose slightly in the Midwest Region between December

1996 and March 1997. Over the same period, the delinquency rate for depositories fell

slightly. There was also a small decline in the delinquency rate for thrifts. At the state level,

Mississippi had the highest depository delinquency rate, while the lowest rate was in North

Dakota. The market delinquency rate was highest in Louisiana, while Nebraska had the

lowest market delinquency rate. According to the April 1997 issue of the FDIC’s Survey of

Real Estate Trends, the Midwest Region experienced improvements in residential markets, but

not to the same extent as the Northeast Region.

Midwest Region

Seriously Delinquent Rate

by Dollar Value

(Source: MIC, TFR)

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

Mar-93

Jun-93

Sep-93

Dec-93

Mar-94

Jun-94

Sep-94

Dec-94

Mar-95

Jun-95

Sep-95

Dec-95

Mar-96

Jun-96

Sep-96

Dec-96

Mar-97

Delinquency Rate (%)

Depositories Thrifts

Market
Mortgage Market Trends Volume 1 Issue 2

Research & Analysis 20 September 1997

West Region

Recent Developments

The delinquency rate for the market rose slightly in the West Region between December

1996 and March 1997. As was the case in the other OTS Regions, the delinquency rate for

depositories fell slightly as did the delinquency rate for thrifts. At the state level, Hawaii had

the highest depository delinquency rate, while the lowest rate was in Oregon. The market

delinquency rate was highest in California, while Oregon also had the lowest market

delinquency rate.

Substantially greater real estate activity in parts of California created a high demand for

purchase loans as evidenced by multiple full-price offers being made on the first day for the

most desirable properties on the residential housing market. Also, for the first time this

decade, the serious delinquency rate on conventional mortgages in Southern California fell.

The Riverside-San Bernadino metropolitan area continued to post the highest delinquency

rate, while the delinquency rate for Los Angeles was similar to the national rate.

West Region

Seriously Delinquent Rate

by Dollar Value

(Source: MIC, TFR)

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

Mar-93

Jun-93

Sep-93

Dec-93

Mar-94

Jun-94

Sep-94

Dec-94

Mar-95

Jun-95

Sep-95

Dec-95

Mar-96

Jun-96

Sep-96

Dec-96

Mar-97

Delinquency Rate (%)

Depositories

Thrifts

Market