Mortgage Market Trends

Volume 1 

Issue 1 

First Quarter 1997

Mortgage Market Trends

National Mortgage Default Rates

and the Vintage Effect

1992 and 1993 Were Very Good Years

Research & Analysis 

Office of Thrift Supervision 

Washington, DC

Initial Issue of Mortgage Market Trends

This is the first issue in a series of reports that will examine developments 

in the residential mortgage market. Each issue will include a detailed 

analysis of one aspect of the market and a data appendix covering current 

trends in national and regional mortgage default rates and home price 

appreciation.

The reports will use data from a variety of sources, including the Mortgage 

Information Corporation’s (MIC) Loan Performance System, OTS’s TFR 

financial data, and the Office of Finance Housing Enterprise Oversight’s 

(OFHEO) House Price Index, among others. 

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The MIC mortgage delinquency data are drawn from the current loan 

portfolios of more than twenty participants. They include Government 

Sponsored Enterprises, banks, thrifts, and non-depository portfolio lenders, 

who, in aggregate, hold more than 21 million loans (with an a total value of 

$1.7 trillion). The loan data are quite detailed, with information on loan-tovalue, size, location, product type, etc. These data are updated monthly.

Our TFR data are much less detailed. For example, we can track mortgage 

delinquency data only on the geographical basis of the headquarters of our 

reporting institutions. The MIC data, on the other hand, permit a 

geographical analysis by the location of the property securing the mortgage.

OFHEO bases its home price appreciation data on same-house resale data 

supplied primarily by Freddie Mac and Fannie Mae. These data are updated 

quarterly. The time series goes back to the early 1980s.

We welcome your comments, especially on how this report might be made 

more useful. 

Mortgage Default Rates Steady in Fourth Quarter 1996

Less than 1% of the 21.3 million residential mortgages tracked by the 

Mortgage Information Corporation (MIC) were seriously delinquent (over 

90 days past-due or in foreclosure) at the end of 1996. This represents a 

small rise in the delinquency rate from the end of the third quarter, but the 

rate remains below its level at the beginning of the year. As the trend line 

for the MIC data in Figure 1 shows, the large rise in the delinquencies that 

occurred during the last two quarters of 1995 and the first quarter of 1996 

leveled off during the last three quarters of 1996.

Figure 1 also shows that the thrift industry has a higher (but parallel) rate of 

seriously delinquent mortgages than the MIC average1. The higher 

delinquency rate for the thrift industry relative to the MIC database may be 

due to the mix of loans tracked by MIC, which is heavily weighted by the 

lower-risk conforming mortgages held by Fannie Mae and Freddie Mac. 

Figure 1 National Mortgage Delinquency Trends 

(Source: TFR, MIC)

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The delinquency rate for the thrift industry continued its now three-quarter 

trend downward to its current level of 1.13%. This decline was preceded by 

a year-long rise during most of 1995 and the first quarter of 1996. The 

delinquency rate is now at its lowest level in the last four years, having 

dropped by more than 40% since the beginning of 1993.

Will the current historically low delinquency rate continue? This report 

explores several aspects of the pool of mortgages now held that suggest that 

delinquency rates will rise over the next few years, even without a downturn 

in the economy. 

As shown in Figure 1, the MIC delinquency rates track the thrift experience 

well, except for one quarter (June 1995), where the sharp decline in the 

MIC delinquency rate was not matched by the thrift industry. Using MIC’s 

wealth of detail on 21.3 million loans that goes back five years, this report 

examines three factors that account for some of the movement in the 

delinquency rates: vintage, loan-to-value (LTV), and product type. We do 

so to provide information about the future performance of the mortgages 

held by thrifts. The MIC data suggest that the current low delinquency rates 

may not persist. 

Vintage Effects

Home mortgages, like wine, vary in quality by year of origin. Delinquencies 

on home mortgages display a well-established distribution or "life-cycle." 

Newly underwritten mortgages tend to have few credit problems, but 

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delinquencies and foreclosures rise sharply after two years, then decline 

after the fifth year. Data provided by Moody’s (see Figure 2) show that 

more than half of all defaults occur in years three through six for 30-year 

fixed-rate mortgages (FRM).2 As mortgages season, though, loan-to-value 

ratios improve as loans amortize and home prices appreciate. This 

seasoning effect is typically accompanied by lower mortgage default rates, 

especially after ten years. 

Figure 2: Default Distribution for 30-Year FRMs 

Percent of the loan pool defaults occurring in each year 

Although delinquency rates in the early years of an origination-year cohort 

tend to be quite low, a higher-than-normal rise in these delinquency rates 

can indicate a higher propensity to default over the cohort’s entire life. Such 

an increase can signal additional credit risk for a portfolio lender, especially 

during the cohort’s default-prone years. As Figure 3 illustrates, recently 

originated loans have a much higher delinquency rate than the 1992 and 

1993 cohorts at the same point in their seasoning (24 months). This has 

raised concerns about the future performance of the 1994 and 1995 cohorts. 

Figure 3: Seriously Delinquent (%) Loans after 24 Months Seasoning

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Mortgage Origination Boom in 1992 and 1993

Loans originated in 1992 and 1993 are now entering their highest defaultprone years. These loans are defaulting at historically low rates. Because of 

the mortgage origination boom of 1992 and 1993, these loans represent a 

large portion (38%) of the loans tracked by MIC and contribute 

substantially to the current low national default rate. As these wellperforming cohorts leave their default-prone years, though, the average 

level of defaults should rise over the next few years, even without any 

deterioration in underlying economic conditions, should the higher 

propensity to default among the recently originated mortgages persist.

The OTS does not collect the origination year for mortgages held by thrifts. 

However, 1992 and 1993 were boom years for the thrift industry’s mortgage 

origination business. Total thrift originations during 1992-1993 ($302 

billion) were 38% higher than the total in 1994-1995 ($219 billion). 

Although thrifts sold many of these mortgages in the secondary market, it is 

likely that the current thrift mortgage portfolios reflect this origination 

pattern. Thus, the thrift and MIC origination data should correspond. 

At origination, borrowers provide a down payment and meet other 

underwriting criteria such as debt service load. Over time, the down 

payment can be eroded through home price depreciation, and personal 

factors can alter a borrower’s financial status. Higher default rates in the 

early years of a mortgage cohort can result from changes in down payment 

and underwriting requirements, changes in the level of debt service load, 

and from rapid shifts in underlying economic conditions, such as 

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employment or home prices. In the next section, we explore some of these 

factors, specifically the composition (LTV, product type, and 

documentation) of the cohorts after 24 months of seasoning, to better 

understand the causes of this vintage effect. 

Changes in the product mix

Loan-to-value (LTV) ratio explains more of the variation in default rates 

than any other factor. Changes in LTV composition might explain why 

1992 and 1993 cohorts are outperforming loans originated in the other 

years. Table 1 shows the LTV composition of the cohorts after 24 months of 

seasoning.

Table 1: LTV Portfolio Composition (Percentage) 

(Source: MIC)

LTV 1991 1992 1993 1994 1995

20-60 24 28 26 17 14

61-70 16 17 17 13 11

71-75 16 16 16 12 11

76-80 21 19 20 20 21

81-90 13 13 13 17 16

91-95 4 4 4 13 16

96-105 4 3 3 6 10

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The data show that the percentage of high LTV loans (over 90%) increased 

dramatically from about 7% in 1991-1993 to 19% in 1994 and 26% in 1995. 

This rise in LTV might be due to changes in underwriting standards, as 

firms might have taken on more risk to gain more return. However, the 

reported increase might also be due to changes in the composition of the 

loan portfolios tracked by MIC, as MIC has added participants over time. 

The more recently added participants have been mostly portfolio lenders.

Table 2: Percentage of Seriously Delinquent Loans 

after 24 Months of Seasoning 

(Source: MIC)

LTV 1991 1992 1993 1994 1995

20-60 0.11 0.03 0.03 0.07 0.09

61-70 0.28 0.11 0.06 0.14 0.19

71-75 0.47 0.18 0.10 0.26 0.31

76-80 0.41 0.19 0.11 0.21 0.24

81-90 0.56 0.34 0.23 0.42 0.53

91-95 0.40 0.31 0.28 0.76 0.96

96-105 1.80 1.14 1.07 1.94 2.55

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Table 2 shows the percentages of seriously delinquent loans by LTV for the 

five cohort years after 24 months of seasoning. Delinquency rates generally 

rise with LTV. Mortgages in the 96-105% LTV category have delinquency 

rates at least sixteen times higher than mortgages in the 60% and below 

LTV category. 

The delinquency rates for the 1992 and 1993 cohorts outperform the other 

years across all LTV ranges. This suggests that the superior performance of 

the 1992-1993 cohorts (or the relative poor performance of the other years) 

is due to other factors, such as product type and documentation.

Table 3 shows the product type and documentation composition of the 

cohorts after 24 months of seasoning. 

Table 3: Cohort Portfolio Composition 

(Source: MIC)

1991 1992 1993 1994 1995

Fixed 15 Yr 23% 36% 33% 20% 10%

Fixed 30 Yr 57% 40% 47% 57% 67%

Variable 11% 14% 12% 18% 14%

Balloon 8% 10% 6% 4% 3%

Low Doc 10% 3% 4% 2% 3%

Full Doc 80% 94% 91% 90% 82%

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The most striking differences in the cohort compositions are found in the 

mix of fifteen and thirty year fixed-rate mortgages, with higher levels of 

fifteen year fixed-rate mortgages in the 1992 and 1993 cohorts, relative to 

the other cohorts, as well as the high level of low-documentation loans in 

the 1991 cohort. 

How these changes in composition affect the performance of the portfolio 

can be inferred on the basis of the risk factors that the national rating 

agencies use in assessing securitized mortgage loan portfolios. Table 4 

shows the various risk factors of a mortgage pool that are then multiplied to 

determine a composite risk measure. 

Table 4: Multiplicative Risk Factors

Characteristic Agency

Moody’s Duff & Phelps

30 Year FRM 1.00 1.00

15 Year FRM .65 .65

ARMs 1.25 1.25

Balloon (7 Yr) 1.20 1.10

Full Documentation 1.00 1.00

Reduced Documentation 1.20 1.50

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No Documentation 1.50+ 1.75+

The 0.65 risk factor for fifteen year mortgages suggests that the shift 

towards fifteen year fixed-rate mortgages in the 1992 and 1993 cohorts 

would contribute much to the lower default rates of those cohorts. The 

higher risk factor for low and no documentation loans also suggests that the 

higher level of such loans in the 1991 cohort might partially account for that 

year’s later poor performance.

Declining interest rates provide an incentive to refinance. Because of the 

rapid and steep decline in mortgage rates in 1992 and 1993, many 

borrowers refinanced their loans. Many also opted for shorter term loans. 

Table 5 shows the composition of cohort years by purpose of loan -- 

purchase vs. refinancing -- which confirms the role of refinancing during 

the 1992-1993 period.

Table 5: Cohort Composition by Purpose 

(Source: MIC)

1991 1992 1993 1994 1995

Purchase 49% 35% 36% 60% 66%

Refinance 47% 64% 62% 38% 27%

Refinancing at a lower interest rate increases the wealth of the borrower, as 

the present value of the borrower’s liability falls. A non-cash out 

refinancing also lowers the borrower’s monthly payment. Risk factors 

provided by Moody’s and Duff & Phelps indicate that mortgages with 

interest rates below 8.00% perform better than those with higher rates. 

Lower rates, with its lower debt service load, as well as the self-selection 

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indicated by refinancing borrowers (borrowers with good payment histories 

are more likely to refinance), have contributed to the superior performance 

of the 1992 and 1993 cohorts. 

Conclusion

The recent average default experience of more than $1.7 trillion in home 

mortgages tracked by MIC has been heavily influenced by the 1992 and 

1993 cohorts. These cohorts are dominated by mortgages with shorter terms 

and lower rates due to the two-year refinancing boom. As a result, these two 

cohorts are performing much better than any prior or subsequent cohort. 

They are now entering their peak default years and thus have contributed 

much to the overall decline in default rates. However, recent data suggest 

we may have seen a low point in average default rates. We are likely to see 

a gradual increase in the default rates as the more recent and poorerperforming cohorts displace the 1992 and 1993 loans in the prime default 

years. 

Footnotes

1 The thrift data include all OTS reporters except one, whose primary 

business involves acquiring seriously delinquent loans. Payment aging is 

based on the payment cycle, rather than the number of calendar days past 

due. For example, a loan is not considered thirty-days past due until the 

second payment has been missed.

2 Moody's Investor Service, "Moody's Approach to Rating Residential 

Mortgage Pass-Through Securities," November 8, 1996. 

Data Appendix (Graphic Intensive) 

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