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Volume 2

Issue 1

March 1998

MORTGAGE PORTFOLIO PERFORMANCE:

STRUCTURAL CHANGES AND

ONE-TIME SHOCKS

Research & Analysis

Office of Thrift Supervision

Washington, DC
Mortgage Market Trends Volume 2 Issue 1

Research & Analysis 1 March 1998

INTRODUCTION

The composition and performance of mortgage portfolios are constantly in flux.

The costs of funding mortgages change, the rates charged on mortgages change;

sometimes they change together, sometimes not. Home prices rise and fall. Local

employment picks up or drops off. Adjustable-rate mortgages are popular, then

fixed-rate become so. Government-backed mortgage programs grow and shrink

with changes in underwriting standards and terms. One-time events, such as hurricanes or earthquakes, can destroy billions of dollars of collateral in seconds, creating losses for both borrowers and lenders.

In this issue we examine a variety of current trends and their impact on the composition and performance of mortgage portfolios. Among them are the effects of

the current lower and flatter yield curve, refinancing activity, growth in government-backed lending, and home price appreciation, especially on the east and

west coasts. In addition, we look at the effects on mortgage portfolio performance of two destructive one-time events. Specifically, we look at how the

Northridge earthquake in California and Hurricane Andrew in Florida affected

home mortgage payment delinquencies and defaults in those areas. These two

events can provide some insight about the relative risk geographically concentrated natural disasters pose to mortgage lenders.

CURRENT MORTGAGE MARKET CONDITIONS

National Delinquency Rates Remain Constant

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 MIC participants,

and a subgroup, the depository institutions, which includes only the FDICinsured MIC participants (a mix of both S&Ls and commercial banks). As the

trend lines in Figure 1 show, the national delinquency rate during 1997 was virtually constant. Both the MIC depository and OTS-regulated (TFR) thrift delinquency rates improved during 1997.

Figure 1 also shows that depositories, as a group, have had higher delinquency

rates than the national average for the entire period. The gap between the depository and the market delinquency rates has diminished substantially since

1993. The thrift industry, in particular, has improved its performance so much

over the last few quarters that its delinquency rate is now slightly below the MIC
Mortgage Market Trends Volume 2 Issue 1

Research & Analysis 2 March 1998

national rate (which is dominated by the GSEs’ portfolio of conforming mortgages).

Figure 1: Percentage of Seriously Delinquent Mortgages

0

0.5

1

1.5

2

2.5

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

M arket Depository TFR

 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 except one that specializes in defaulted mortgages. Because of their size and location, the performance of MIC thrift participants

differs significantly from the average OTS-regulated thrift.

The rate of seriously delinquent mortgages for OTS-regulated thrifts, as shown

by the TFR data in Figure 1, has declined by 33 percent over the last four years.

Figure 2 shows the regional detail behind the improvement of the overall thrift

delinquency rate. As can be seen, the decline in the average delinquency rate is

due entirely to the improvement on the two coasts -- the Northeast and West regions.

The California housing markets have a disproportionate effect on the thrift industry totals, given the concentration of thrift mortgages in California. The recent improvement in real estate conditions in the west coast housing markets –

reflected directly in house price changes -- accounts for much of the decline in

delinquency rates. According to the Office of Housing Enterprise Oversight

(OFHEO) House Price Index, home prices appreciated 5.6 percent in 1997 in

California, reversing a five-year trend of falling or flat home prices.

Of the ten geographical divisions tracked by OFHEO, the Pacific area had the

greatest home price appreciation (+5.7 percent) in 1997. New England placed

third with 5.2 percent. (See the data appendix for home price appreciation conditions for all the states.) Improving real estate markets on the two coasts have

materially affected the average delinquency rate for thrifts, and are likely to continue doing so in the near future.
Mortgage Market Trends Volume 2 Issue 1

Research & Analysis 3 March 1998

Figure 2: OTS Regional Delinquency Rates

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

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

National NE SE Central Midwest West

Falling Long-term Interest Rates, Constant Short-term Interest Rates

During 1997, mortgage-related interest rates rose early in the year, peaked in

April, and then began to decline. Figure 3 shows two mortgage-related interest

indices and the Freddie Mac commitment rate for thirty-year fixed-rate mortgages, as reported by the Federal Reserve Board of Governors. The one-year

constant maturity Treasury (one-year CMT) index, which is representative of the

various indices used to set one-year adjustable mortgages, began 1997 at about

5.5% and ended the year at almost the same level. In fact, this index has changed

little since July. On the other hand, the ten-year constant maturity Treasury (tenyear CMT) index has declined steadily since April, and ended the year at 5.7%, a

level it had not reached since January of 1996. The index has dropped by more

than a hundred basis points since April. The ten-year CMT index tracks the

commitment rate for thirty-year fixed rate mortgages well.

This absolute and relative (to the one-year CMT) decline in the ten-year rate has

had two effects. First, the decline in the long rate makes a fixed-rate mortgage

now relatively more attractive than an adjustable rate mortgage. This should lead

to a higher percentage of fixed-rate mortgages among new originations. Second,

the lower rate on new fixed-rate mortgages should lead to a higher level of refinancings, as borrowers either replace older, higher fixed-rate mortgages with new

lower fixed-rate mortgages or replace adjustable-rate mortgages with fixed-rate

ones.
Mortgage Market Trends Volume 2 Issue 1

Research & Analysis 4 March 1998

Figure 3: Mortgage Related Interest Rate Indices

5

5.5

6

6.5

7

7.5

8

8.5

Dec-95 M a r-96 Jun-96 Sep-96 Dec-96 M a r-97 Jun-97 Sep-97 Dec-97

M ortgage Co m m itment Rate

10 Year C M T

1 Year C M T

The amount of refinancing is determined by the current and recent past levels of

longer-term interest rates and the rate of decline. A longer view of the commitment rate on fixed-rate mortgages puts the current levels of mortgage interest

rates into this perspective. Figure 4 shows the thirty-year fixed-rate mortgage

commitment rate since 1991.

Figure 4: Mortgage Commitment Rate (FHLMC)

6.5

7

7.5

8

8.5

9

9.5

1 0

Jan9 1Jul-91 Jan9 2Jul-92 Jan9 3Jul-93 Jan9 4Jul-94 Jan9 5Jul-95 Jan9 6Jul-96 Jan9 7Jul-97

M ortgage Co m m itment Rate

Because of transaction costs, mortgage rates historically needed to move one or

two percentage points below a mortgage’s current rate to make refinancing

worthwhile. But competition and new products have lowered this threshold.

While the current rates are lower than they have been in the recent past, they

have not fallen as quickly or to the level they reached during the height of the refinancing boom in 1993. Almost a quarter of the mortgage loans now held, according to the MIC data, were originated in 1993, when mortgage rates were as

low as or lower than they are now. Thus, a smaller refinancing surge is likely now

if mortgage rates do not go much lower. We examine the likely effect of refinancings on portfolio lenders in more detail below.
Mortgage Market Trends Volume 2 Issue 1

Research & Analysis 5 March 1998

Market Share Data

Table 1 reports data on mortgage loan originations from HUD’s Survey of Mortgage

Lending Activity (SMLA). The second quarter data are the most recent available.

In the second quarter of 1997, the thrift industry’s (Savings Banks and Savings

Associations) market share of single-family residential mortgages rose to 20.7%

from 18.8% at year-end 1996. Savings banks’ market share stayed constant during

the first two quarters of this year, but the Savings & Loans gained market share

during the second quarter, rising to 17.5%, its highest level since 1993. Commercial banks also enjoyed a substantial increase in market share, rising to 27% in

June 1997 from 24.6% at year-end 1996. The market share for mortgage banks

fell to 51.7% from 55.9% at year end 1996. As a result, FDIC-insured portfolio

lenders (banks and thrifts) have 47.7% of the mortgage origination market, their

highest market share in some time.

Current Mortgage Rates and Terms

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

being originated. 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 eighteen months for conventional

(non-government-backed) mortgages.

Table 2 shows that, for all three lender groups, mortgage effective interest rates

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

have declined sharply since the end of June 1997. For S&Ls, the current average

is 7.05%, for commercial banks, 7.46%, and for mortgage companies, 7.51%. 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 Market Shares

($ in millions)

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 28.0% 5651 3.3% 25015 14.6% 91819 53.5% 171787

 Q2 53070 27.0% 6286 3.2% 34410 17.5% 101830 51.7% 196910

Source: Survey of Mortgage Lending Activity, HUD

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

Research & Analysis 6 March 1998

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

mortgages originated by S&Ls – adjustable-rate mortgages (ARMs) and loan-tovalue (LTV) ratios. S&Ls have traditionally originated a higher proportion of

ARMs than either commercial banks or mortgage banks, and this pattern prevailed over the last year and a half. The differences are especially striking for the

December 1997 data. While 45% of the S&Ls’ originations were adjustable rate,

only 9% of the commercial banks’ and 8% of the mortgage companies’ were adjustable rate. ARMs 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 ratios can also create differences

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

companies. Over the last year and a half, S&Ls have continued to originate a

much smaller percentage of their loans in the highest LTV category (greater than

90% LTV ratio) than the two others. In December 1997, the percentage of high

LTV-ratio mortgage originations was only 14% for S&Ls versus 35% for commercial banks, and 27% for mortgage companies. Higher LTV-ratio loans are

riskier and should carry a higher rate and/or more fees and charges than lower

LTV-ratio loans. For S&Ls, 73% of the originations have LTVs of less than 80%.

The corresponding percentage for commercial banks is 50% and 55% for mortgage banking companies.

Table 2: Mortgage Rates and Terms

(In percent)

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 7.33 22 45 16 17 56

Sep-97 7.12 21 49 15 15 53

Dec-97 7.05 25 48 13 14 45

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

Sep-97 7.59 22 37 17 24 16

Dec-97 7.46 18 32 16 35 9

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

Sep-97 7.77 19 36 18 27 13

Dec-97 7.51 19 36 17 27 8

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

Research & Analysis 7 March 1998

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

affect not only the effective interest rates but also the longer-term delinquency

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

Effects of Refinancing

As Figure 3 showed, the difference between the one-year and the ten-year constant maturity Treasury interest rates narrowed considerably during 1997. In addition, long term mortgage commitment rates during the third quarter of 1997

approached the low levels reached in 1993 at the peak of the previous refinancing

boom. Unexpectedly high levels of prepayments lowers the value of servicing

rights and portfolio holdings, as either mortgages are lost to other lenders or are

replaced with ones with lower contract rates.

With the current flat yield curve and relatively low long term rates, some homeowners are converting their adjustable-rate mortgages to fixed-rate mortgages

(FRM) to protect themselves against future rate increases. Another important adverse effect of this type of refinancing on thrifts is that it may raise the interest

rate risk for the industry if thrifts’ portfolios have fewer ARMs and more FRMs.

At the end third quarter, ARMs represented 68.9 percent of the mortgage portfolios held by OTS thrifts, down slightly from the first quarter level of 69.2 percent. For more information on the interest rate risk of the thrift industry, see the

Quarterly Review of Interest Rate Risk on the OTS web site,

WWW.OTS.TREAS.GOV.

There is a positive side to all of this for thrifts. Holding all else constant, as the

percentage of ARMs held in thrift mortgage portfolios falls, thrifts become less

exposed to the credit risk associated with variable-rate mortgages in periods of

rising interest rates (payment shock). A previous Mortgage Market Trends’ analysis

showed that mortgages refinanced in 1992 and 1993 have outperformed virtually

any other mortgage cohorts. Whether the current refinancing cohort will perform similarly, though, remains to be seen.

Although the current refinancing activity should produce some short term gains

for thrifts as unamortized points and fees are taken into income, the longer term

effects are less certain. Any long term credit risk improvement may be offset by

higher interest-rate risk from a refinancing-induced shift towards fixed-rate mortgages. As interest rates rise, the market value of the fixed-rate mortgages held by

thrifts fall. This could diminish the equity value of a thrift unless it is hedged

against the rise in rates.
Mortgage Market Trends Volume 2 Issue 1

Research & Analysis 8 March 1998

FHA Developments

FHA mortgages continue to grow as a proportion of all mortgages held by depositories. At the end of 1997, FHA loans represented 11.8% of the total loans

held by depositories. Four years earlier, FHA loans represented just 4.3% of their

total.

The rapid growth in FHA loans originations, especially ARM originations, has

been the result of several factors, including expanded outreach efforts, a reduction in the guarantee fee, rising loan limits, and changed underwriting standards.

This growth has not

been without its

costs, however. Table 3 shows the cohort performance

for conventional

and governmentbacked mortgages

after twenty-four months of seasoning. In other words, it shows how mortgages

originated in one year were performing at the end of the next year. The increase

in the ratio of the government-backed seriously delinquent rate to that of the

conventional mortgages shows the deterioration in their relative performance

over the last 5 years. As the table shows, the performance of government-backed

mortgages has deteriorated so much that government-backed mortgages originated in 1996 were more than seven times as likely as conventional mortgages to

become seriously delinquent. Five years ago, the ratio was less than three times

(2.7X).

THE EFFECT OF NATURAL DISASTERS

In this section, we examine the effect that two natural disasters, Hurricane Andrew and the Northridge earthquake,

had on home mortgage delinquency

rates. Because natural disasters are

geographically concentrated, they can

pose a significant risk to lenders with a

high proportion of assets in the affected areas. However, several factors

may mitigate the losses to mortgage

lenders in the event of natural disasters.

Not all borrowers will default on their

loans, even if they experience losses.

Insurance may cover some or all of

the home owner’s losses. Single-family

mortgages are also typically secured not only by the house but also by the land on

Table 3: Cohort Performance

(Percent of Mortgages Seriously Delinquent)

Origination Year

1992 1993 1994 1995 1996

Conventional 0.45 0.25 0.32 0.40 0.34

Gov’t-Backed 1.22 1.11 1.98 2.44 2.52

Ratio 2.7 4.4 6.2 6.1 7.4

Northridge Damage (FEMA Picture)
Mortgage Market Trends Volume 2 Issue 1

Research & Analysis 9 March 1998

which the house sits. In the event of a default by the borrower, even if the house

itself is destroyed, the land usually remains, providing some value to the lender.

Natural disasters also cause short-term disruptions that can interfere with timely

mortgage payments. Lags in insurance payments, employment disruptions, and

lost records can cause late or delayed payments. Whether or not a surge in missed

mortgage payments presages a sharper than normal subsequent rise in defaults

can be difficult to determine in the immediate aftermath of a natural disaster. The

following analysis looks at the pattern of mortgages 30 days past due and those

90 days or more or in default (seriously delinquent) for two major disasters. The

analysis examines the impact at the MSA level, since this is the most disaggregated level of data we have available.

On August 24, 1992, Hurricane Andrew hit southern Florida with winds recorded

at 165 miles per hour. In its wake, it left 15 people dead, forced one million people to evacuate the area, and destroyed or damaged 126,000 homes and 9,000

mobile homes. Eleven thousand apartment units were destroyed and another

28,000 apartment units were damaged. The geographic region hit by Andrew was

declared a national disaster area, with total losses estimated at over $30 billion.

Insurance covered $15.5 billion of the losses, resulting in $14.5 billion in uninsured losses.

Figure 5 shows mortgage delinquency rates for the Miami MSA in the quarter

prior to Hurricane Andrew and for the subsequent four quarters. The results

show a one-time increase in mortgages 30 days past due in the first quarter immediately following the hurricane, with the delinquency rate falling back to predisaster levels rather quickly. The seriously delinquent rate peaked two quarters

after the hurricane, and then returned to its pre-disaster level about a year later.

Figure 5: Hurricane Andrew on August 24, 1992

0

0.5

1

1.5

2

2.5

3

Jun -92 Sep -92 Dec -92 M a r-93 Jun -93

30 days past due

Seriously Delinquent

About a year and a half after Hurricane Andrew struck southern Florida, the Los

Angeles area was rocked by the Northridge earthquake on January 17, 1994. The

Northridge earthquake, one of the most costly natural disasters in the United

States, measurably rearranged 2,192 square miles of metropolitan Los Angeles,

resulting in some portions being two feet higher than before. Approximately

114,000 residential and commercial structures were damaged. Overall damages

have been estimated at $25 billion. Only $4.5 billion of the losses were insured,
Mortgage Market Trends Volume 2 Issue 1

Research & Analysis 10 March 1998

resulting in $21.5 billion in uninsured losses. Aftershocks from the 6.7 quake affected the area for three days after the initial severe shock, producing additional

damage.

Figure 6 shows mortgage delinquency rates for the Los Angeles MSA in the

quarter prior to the Northridge earthquake and for the subsequent eight quarters.

Similar to Figure 5, the results show a sharp one-time increase in mortgages 30

days past due in the first quarter immediately following the earthquake and then

reverting to its pre-disaster level rather quickly. Although the seriously delinquent

rate peaked two quarters after the earthquake, it did not return to its pre-disaster

level within a year, as was the case for Hurricane Andrew. The data indicate that

the seriously delinquent rate for the Los Angeles MSA remained above the predisaster level for at least the following two years.

The magnitude of the uninsured losses from the Northridge disaster may have

accounted for the persistently higher seriously delinquent rate. As previously

noted, the Northridge earthquake is the most costly (net of insurance) natural

disaster to have occurred in the United States. It caused massive structural damage to both residential and commercial properties, the extent of which was not

known for months afterwards. As a result of these various factors, it is not surprising that seriously delinquent rates stayed at levels much higher than predisaster levels for an extended period of time.

Figure 6: Percentage of Mortgages Delinquent in the Los Angeles MSA

around the Northridge Earthquake on Jan. 17, 1994

0

0.5

1

1.5

2

2.5

3

Dec-93 Jun-94 Dec-94 Jun-95 Dec-95

Seriously Delinquent

30 Days Past Due

Property Types and Disaster Damage in LA

The types of properties securing the loans might also have affected the delinquency rates. At the end of 1993, 12.6 percent of the mortgages tracked by the

MIC system in the LA MSA area were secured by condominiums. Single family

mortgages made up 79 percent. The balance were co-op and 2-4 family mortgages.

As collateral, condominiums differ in important ways from single family homes.

Condominiums, unlike single family homes, share in the common ownership of

the land and amenities that comprise the condominium complex. Insurance cov-
Mortgage Market Trends Volume 2 Issue 1

Research & Analysis 11 March 1998

erage and other disaster relief measures may vary between condominiums and

common areas. Condominiums are often in multi-unit buildings. Because of the

type of construction, condominiums may suffer more damage in an earthquake

but less damage than single family homes in a hurricane.

Figure 7 shows the percentage of seriously delinquent mortgages for condominiums and single family homes in the LA MSA, for the quarter before and the

three quarters following the earthquake. Single family mortgages showed only a

slight increase in seriously delinquencies, and the rate quickly returned to its preearthquake level. Condominium mortgages behaved much differently. The rate of

seriously delinquent condominium mortgages rose dramatically and remained

substantially above its pre-earthquake level. The increase in condominium delinquencies accounted for virtually all of the increase in the overall delinquencies.

Figure 7: Decomposition of Seriously Delinquent Mortgages for Condominiums and Single Family Homes around the Northridge Earthquake

0

0.5

1

1.5

2

2.5

3

3.5

Dec -93 Jun -94 Dec -94 Jun -95

Single Family

Condo

A further disaggregation by property type of the seriously delinquent mortgages

into those past 90 days due and those in foreclosure underscores the differential

impact of the Northridge earthquake on condominiums.

Figure 8: Decomposition of Condominium Mortgages Seriously Delinquent around the Northridge Earthquake

0

0.5

1

1.5

2

2.5

3

3.5

Dec -93 Jun -94 Dec -94 Jun -95

In Foreclosure

90 Days Past Due

Figure 8 shows that in the quarter before the earthquake most (77%) of the seriously delinquent condominium mortgages were those in foreclosure. At the end

of June 1994, about five months after the earthquake, the overall seriously delinquent rate had doubled for condominiums. Within the overall rate, the mortgages
Mortgage Market Trends Volume 2 Issue 1

Research & Analysis 12 March 1998

90 days past due accounted for most of the increase. The percentage of condominium mortgages 90 days past due increased 383%, from 0.37% in December

1993 to 1.79% in June 1994. The percentage of condominium mortgages in foreclosure rose 46%, from 1.22% in December to 1.79% in June.

The decline in the ratio of in foreclosure to 90 days past due after the earthquake

suggests that the mortgages that were 90 days past due were not rapidly passing

into the foreclosure category. This may have occurred because of forebearance,

delays in processing, or some combination of the two.

Figure 9 shows the relative performance for single family mortgages around the

Northridge earthquake. While the rate for mortgages 90 days past due rose immediately after the earthquake, it dropped back in the following quarter. A year

later, the rate reverted to its pre-earthquake level. Remarkably, the rate of single

family mortgages in foreclosure varied little over the entire two-year span.

Figure 9: Decomposition of Single Family Mortgages Seriously Delinquent

around the Northridge Earthquake

0

0 . 5

1

1 . 5

2

2 . 5

3

3 . 5

D e c - 9 3 Jun - 9 4 D e c - 9 4 Jun - 9 5

In Foreclosure

90 Days Past Due

Condominium and Single Family Home Damage in Miami

At the end of June 1992, the quarter preceding Hurricane Andrew, condominium

mortgages represented 22.7 percent of the mortgages tracked by MIC in the Miami MSA, a presence almost twice that in Los Angles. After Hurricane Andrew,

the seriously delinquent rate rose for both condominiums and single family

mortgages, but less for condominiums than for single family mortgages. Figure

10 shows the performance of condominium mortgages, which perform like the

single family mortgages in Los Angles.
Mortgage Market Trends Volume 2 Issue 1

Research & Analysis 13 March 1998

Figure 10: Decomposition of Condominium Mortgages Seriously Delinquent around Hurricane Andrew

0

0 .5

1

1 .5

2

2 .5

3

3 .5

Jun-92 Dec -92 Jun-93

In Fo reclosure

90 Days Pas t Due

The performance of single-family mortgages is shown in Figure 11. They perform slightly worse than the condominium mortgages, but the difference not

large.

Figure 11: Decomposition of Single Family Mortgages Seriously Delinquent around Hurricane Andrew

0

0.5

1

1.5

2

2.5

3

3.5

Jun-92 Dec-92 Jun-93

In Fo reclosure

90 Days Past Due

Local Market Conditions

The single most important determinant of default for a mortgage is its loan-tovalue ratio. Local real estate market conditions affect the value of not only the

house or condominium but also the land on which it sits. A major difference

between Hurricane Andrew and the Northridge earthquake was the state of the

local real estate markets. Real estate prices were rising strongly in Miami around

the time of Hurricane Andrew and continued to do so. Real estate prices were

falling in Los Angeles around the time of the Northridge earthquake and continued to do so.

Condominium prices are often more sensitive to changes in local real estate conditions. In a declining market, they can lose more value than single family structures because they are more of a commodity and can be more easily substituted
Mortgage Market Trends Volume 2 Issue 1

Research & Analysis 14 March 1998

one for another. Much of the difference in performance between condominiums

in Los Angeles and Miami after the disasters might be due more to market conditions than to the disaster itself.

CONCLUSION

The mortgage market, and mortgage delinquency rates in particular, remain vulnerable to external shocks, whether man-made or natural. The impact of a

structural change or significant economic shock, however, may be more subtle

and difficult to detect, and potentially much more dangerous, than that of a natural disaster. The financial fallout from natural disasters on thrifts and banks tends

to be localized and minor compared to the broader effects of systemic structural

changes. For example, the Northridge earthquake and Hurricane Andrew, while

devastating, caused much less loss of capital to insured depositories than the inverted yield curve in the early nineteen eighties. While the structural changes in

rates and composition we have observed here are clearly not of that magnitude,

they nonetheless raise some credit and interest rate risk concerns that warrant

continued attention.
Mortgage Market Trends Volume 2 Issue 1

Research & Analysis 15 March 1998

Mortgage Market Trends

Volume 1 Issue 3

March 1998

Data Appendix

National and Regional Trends in Mortgage Delinquency Rates

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

Research & Analysis 16 March 1998

Regional and State Analysis

Seriously Delinquent & Home Price Appreciation Rates as of 12/31/97

(Based on $)

MIC SD TFR SD Home Price Appreciation

Market Depositories 1-Year 5-Year

National 0.97 1.28 0.94 4.7 18.1

Northeast 1.24 1.64 0.93

Connecticut 1.23 1.46 0.80 3.6 0.5

Delaware 0.89 1.07 1.09 2.0 4.6

Maine 0.81 1.45 1.12 3.6 8.0

Massachusetts 0.69 0.88 0.48 6.0 15.7

New Hampshire 0.56 0.78 0.48 5.1 10.2

New Jersey 1.59 2.03 1.26 3.6 7.2

New York 1.54 1.82 0.93 3.2 4.2

Pennsylvania 1.08 1.56 0.82 2.4 8.3

Rhode Island 0.80 1.09 2.77 3.2 2.3

Vermont 0.57 0.99 2.12 3.2 5.4

West Virginia 0.36 0.88 0.93 8.3 28.3

Southeast 1.10 1.47 0.94

Alabama 0.63 1.28 1.27 4.3 25.1

DC 1.59 1.68 1.90 2.6 2.3

Florida 1.28 1.65 0.68 4.5 16.2

Georgia 0.84 1.19 0.81 5.8 23.2

Maryland 1.65 2.14 1.97 2.4 6.5

North Carolina 0.69 0.99 0.56 6.3 27.9

Puerto Rico 0.99 2.76 7.36 * *

South Carolina 0.75 1.03 0.43 6.6 24.0

Virginia 0.93 1.17 0.91 2.5 9.3

Central 0.63 1.15 0.68

Illinois 0.88 1.30 0.78 3.1 21.3

Indiana 0.62 1.19 0.88 4.9 28.9

Kentucky 0.38 0.82 0.61 4.7 28.7

Michigan 0.25 0.52 0.81 7.2 38.3

Ohio 0.59 1.12 0.60 4.7 28.0

Tennessee 1.17 1.76 0.55 5.5 31.2

Wisconsin 0.29 0.65 0.31 4.4 34.8

Midwest 0.64 0.88 0.68

Arkansas 1.10 1.91 0.68 4.5 26.7

Colorado 0.37 0.47 0.16 6.4 50.2

Iowa 0.26 0.42 0.77 4.0 30.3

Kansas 0.52 0.80 0.26 4.9 30.3

Louisiana 1.07 1.76 0.44 4.8 31.1

Minnesota 0.42 0.53 0.33 5.2 28.6

Mississippi 0.87 2.30 1.25 4.0 26.6

Missouri 0.49 0.71 0.41 4.2 24.0

Nebraska 0.25 0.38 0.75 3.9 33.4

New Mexico 0.64 0.81 0.89 3.5 34.5

North Dakota 0.41 0.48 0.36 1.9 27.0

Oklahoma 0.79 1.23 0.64 3.4 22.0

South Dakota 0.43 0.57 0.44 4.4 32.8

Texas 0.87 1.16 0.97 3.0 14.1

West 1.03 1.20 1.12

Alaska 0.39 0.79 - 1.2 19.5

Arizona 0.63 0.80 0.17 4.8 29.5

California 1.19 1.34 1.16 5.6 -3.0

Hawaii 1.54 2.10 1.69 -5.1 -10.9

Idaho 0.64 0.81 0.09 5.6 36.6

Montana 0.60 0.81 0.23 4.4 44.0

Nevada 1.06 1.27 - 3.1 16.1

Oregon 0.32 0.38 0.75 6.3 53.2

Utah 0.53 0.80 0.81 6.1 71.6

Washington 0.59 0.69 0.29 5.8 23.7

Wyoming 0.42 0.64 0.50 3.6 37.9
Mortgage Market Trends Volume 2 Issue 1

Research & Analysis 17 March 1998

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%

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

National NE SE Central Midwest West

Home Price Appreciation

1997 Annual Rate

(Source: OFHEO Resale Database)

House Price Appreciation

1997

5.1 to 8.3 (15)

1.7 to 5.1 (34)

-1.7 to 1.7 (1)

-5.1 to -1.7 (1)
Mortgage Market Trends Volume 2 Issue 1

Research & Analysis 18 March 1998

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, Percent Seriously Delinquent)

0

0.2

0.4

0.6

0.8

1

1.2

1991 1992 1993 1994 1995 1996 1997

Purchase

Refinancing

Fixed Vs. Variable Rate Mortgages

(Source: MIC, Percent Seriously Delinquent)

0

0.5

1

1.5

2

2.5

1991 1992 1993 1994 1995 1996 1997

Variable

Fixed