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Volume 2

Issue 2

August 1998

THE CURRENT REFI BOOM:

CAUSES AND CONSEQUENCES

Research & Analysis

Office of Thrift Supervision

Washington, DC
Mortgage Market Trends Volume 2 Issue 2

Research & Analysis 1 August 1998

INTRODUCTION•

The mortgage refinancing boom in 1992-1993 created a cohort of residential

mortgages that have performed extremely well by any measure. As long-term interest rates have declined over the last eight months, refinancing activity has

surged once again. As a result, portfolio lenders have been adding refinanced

mortgages to their holdings at a steadily increasing rate over the last three quarters. Almost half of the additions to the portfolio holdings tracked by the Mortgage Information Corporation (MIC) in the first quarter of 1998 were refinanced

mortgages, having risen from 25 percent in the second quarter of 1997.

In this issue, we examine the current refinancing boom and its likely impact on

future mortgage portfolio performance. Many factors affect the decision to refinance, as it represents the exercise of an option to exchange an existing mortgage

contract for a new one. The factors include the contractual terms of the current

and future mortgages, past and expected movements in interest rates (both long

and short), the level of transaction costs, and the length of time it will take to recapture the costs. These factors influence the decision not only as to when to refinance but also as to what type of mortgage to choose.

While some of the factors underlying the current refi boom are similar to those

that existed in 1992-1993, others are much different. Consequently, the composition of the current refinanced mortgage cohort and its impact will likely be different from the last refi boom. In this issue of Mortgage Market Trends, we explore

more fully the similarities and differences between this refi boom and the last one

and their implications. First, though, we look at current mortgage market conditions.

CURRENT MORTGAGE MARKET CONDITIONS

National Delinquency Rates Remain Low

Figure 1 presents a plot of the percentage of seriously delinquent (90 days pastdue or in foreclosure) residential mortgages, using both the Mortgage Information Corporation (MIC) and Thrift Financial Report (TFR) data. Since the first

issue of the Mortgage Market Trends, we have divided the MIC data into two

groups: the market, which includes all MIC participants, and a subgroup, depository institutions, which includes only the FDIC-insured MIC participants (a

mix of S&Ls and commercial banks). As the trend line in Figure 1 shows, the national delinquency rate has changed little over the last year. However, both the

MIC depository and OTS-regulated (TFR) thrift delinquency rates have improved.

 

•

 Prepared by Jonathan Jones, John LaRocca, and Fred Phillips-Patrick, Research & Analysis Division,

Office of Thrift Supervision. Please email any comments or questions to fred.patrick@ots.treas.gov.
Mortgage Market Trends Volume 2 Issue 2

Research & Analysis 2 August 1998

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

rate 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 below the MIC 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

Mar-94 Sep -94 Mar-95 Sep -95 Mar-96 Sep -96 Mar-97 Sep -97 Mar-98

Depository

TFR

M arket

 Source: MIC and TFR. The Market contains the combined data of the depository and nondepository 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.

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

delinquency rate. The decline in the OTS average delinquency rate is due almost

entirely to the improvement on the two coasts -- the West region and especially

the Northeast region.

Overall, the California housing market has a disproportionate effect on the thrift

industry totals because of the concentration of thrift mortgages in that state. 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, over the last four quarters, home prices have appreciated 7.3 percent in California, among the largest increases in the nation.

Figure 2: OTS Regional Delinquency Rates

0 .0 0 %

0 .5 0 %

1 .0 0 %

1 .5 0 %

2 .0 0 %

2 .5 0 %

M a r-94 Sep -94 M a r-95 Sep -95 M a r-96 Sep -96 M a r-97 Sep -97 M a r-98

N a t i ona l N E S E Cen tral M i dwes t Wes t
Mortgage Market Trends Volume 2 Issue 2

Research & Analysis 3 August 1998

Serious Delinquencies Vary by Location and Product Type

In March 1998, the states with the highest rates of seriously delinquent loans (by

dollar value) were Maryland (1.69%), Hawaii (1.67%), New Jersey (1.60%), District of Columbia (1.56%), and New York (1.55%). The national average was

0.97%. California’s rate improved from 1.19% in December to 1.16% in March.

The delinquency rate in Hawaii showed one of the sharpest increases, up from

1.54% in the December, reflecting the deterioration in home prices in that market. Over the last four quarters, Hawaiian home prices have fallen 1.9%, according to OFHEO House Price Index, the only state to show a decline in prices

over that period. Over the last five years, Hawaiian home prices have decline by

9.8%, the worst (and only decline) in the country.

In individual markets, Riverside, California, leads the nation with a seriously delinquent rate of 2.83%, followed by Memphis, Tennessee (2.4%), and Scranton,

Pennsylvania (2.16%). Among major markets, Miami (1.82%) and Los Angeles

(1.66%) are both in the top ten in terms of delinquency rates.

Table 1: Seriously Delinquent Rates, as of March 1998

Table 1 shows the seriously delinquent rates for different product types based on

whether the mortgages were for purchase or for refinancing. Refinanced mortgages perform much better than home purchase mortgages in almost all cases.

The one exception is COFI ARMs, where the refinanced mortgages have a

slightly higher delinquency rate than COFI ARM home purchase loans.

Home Purchase Refinancing

Conventional 0.90% 0.47%

 15-Yr Fixed 0.54 0.15

 30-Yr Fixed 0.88 0.57

Adjustable Rate 1.33 1.18

 T-Bill 1.29 1.10

 COFI 1.27 1.28

Government 3.94 2.56

 FHA 4.14 2.33

 VA 3.55 2.85

All Loans 1.46% 0.56%

Source: Market Pulse, 3/98, MIC
Mortgage Market Trends Volume 2 Issue 2

Research & Analysis 4 August 1998

Market Share Data

Table 2 reports data on mortgage loan originations from HUD’s Survey of Mortgage

Lending Activity (SMLA). The third quarter 1997 data are the most recent available. In the third quarter of 1997, the thrift industry’s (Savings Banks and Savings

Associations) market share of single-family residential mortgages fell back from

20.7% in the second quarter to 17.9%. Commercial banks also declined in market

share, falling to 23.7% in the third quarter from 26.8% in the second quarter. The

market share for mortgage banks rose to 57.7% from 52% in the second quarter.

FHA Developments

At the end of March

1998, FHA loans represented 7.93% of the total loans held, slightly

more than that at the

end of 1997 (7.71%).

Four years earlier, FHA

loans represented just

2.89% of their total.

The rapid growth in FHA loan 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 performance for conventional and government-backed mortgages in the first quarter

of each year. The increase in the ratio of the government-backed seriously delinquent rate to that of the conventional mortgages illustrates the serious 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 are now in serious delinquency at a rate almost

five times more than conventional mortgages. Five years ago, the ratio was less

than two times. Note that while the performance of government-backed mortgages has deteriorated, the performance of conventional mortgages has improved.

Table 2: 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%!

K2 Is

$114557 59.0% $194196

Q2 45927 22.0% 9120 4.4% 35064 16.8%!

Error

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 53.4% 171787

 Q2 53150 26.8% 6286 3.3% 34411 17.3% 103294 52.0% 196910

Q3 52667 23.7% 5210 2.3% 34518 15.6% 128126 57.7% 221888

Source: Survey of Mortgage Lending Activity, HUD

CB, Commercial Banks; SB, Savings Banks; S&L, OTS thrifts; MC, Mortgage Companies

Table 3: Performance by Loan Type

(Percent of Mortgages Seriously Delinquent)

First Quarter

1994 1995 1996 1997 1998

Conventional 1.07 0.91 0.83 0.77 0.66

Gov’t-Backed 2.12 2.51 2.82 3.06 3.24

Ratio 1.98 2.76 3.40 3.97 4.91
Mortgage Market Trends Volume 2 Issue 2

Research & Analysis 5 August 1998

THE CURRENT REFINANCING BOOM

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

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, 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. It dropped sharply in January, rebounded in February and March, but

stayed below its year-end level.

The ten-year constant maturity Treasury (ten-year CMT) index declined steadily

from April through January, then mimicking the one-year CMT, rebounded

slightly in February and March, ending the first quarter at 5.65%. The index has

dropped by more than a hundred basis points from April 1997 to March 1998.

The ten-year CMT index tracks the commitment rate for thirty-year fixed rate

mortgages, although the spread between them is not constant and has widened

of late.

Figure 3: Mortgage Related Interest Rate Indices

5

5.5

6

6.5

7

7.5

8

8.5

Dec-95 Mar-96 Jun-96 Sep-96 Dec-96 Mar-97 Jun-97 Sep-97 Dec-97 Mar-98

Mortgage Commitment Rate

10 Year CMT

1 Year CMT

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 their existing higher fixed-rate mortgages

with lower fixed-rate mortgages or replace adjustable-rate mortgages with fixedrate ones.

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

levels of interest rates, which affects how many higher rate mortgages are outstanding, and the current rate of change in interest rates. 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.
Mortgage Market Trends Volume 2 Issue 2

Research & Analysis 6 August 1998

Figure 4: Mortgage Commitment Rate (FHLMC)

6.5

7

7.5

8

8.5

9

9.5

10

Mar91Sep91Mar92Sep92Mar93Sep93Mar94Sep94Mar95Sep95Mar96Sep96Mar97Sep97Mar98

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.

Figure 5: Refinancing mortgages as percent of total quarterly additions to

portfolio holdings and the FHLMC commitment rate.

0

10

20

30

40

50

60

70

80

Mar92Sep92Mar93Sep93Mar94Sep94Mar95Sep95Mar96Sep96Mar97Sep97Mar98

Percent Refi's

6.6

7.1

7.6

8.1

8.6

9.1

Mortgage Rate

Mortgage Commitment Rate

Refi Percentage

(Source: FHLMC and MIC)

Figure 5 shows the relationship between movements in mortgage rates and the

amount of refinancing activity. During the first quarter of 1998, almost half of

the mortgages added to portfolio holdings were refinanced loans. During the refi

boom of 1992-1993, between sixty and seventy percent of the portfolio additions

were refinanced loans. It seems unlikely that the current refi boom will result in

the same percentage additions as the previous one for several reasons. First, the

overhang of high interest rate mortgages is less due to the large number of loans

that were refinanced less than five years ago. According to MIC, over fifty percent (52.8%) of mortgages now have rates between 7 and 8 percent. This contrasts sharply with the level in March 1993, when just twenty percent of
Mortgage Market Trends Volume 2 Issue 2

Research & Analysis 7 August 1998

mortgages fell in that range. Second, interest rates have not dropped as fast or as

far as in 1992-1993. Third, the level of activity in home purchase mortgages is

surging as well. For example, housing starts are now near a decade-high level,

consistently running above 1.5 millions units over the last six months.

Declining ARM Share

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 conventional (non-government-backed) mortgages. Table 4 reports the survey results for the months ending each quarter over the last eighteen

months.

Table 4 shows that, for all three lender groups, effective mortgage 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 6.96%, for commercial banks, 7.22%, and for mortgage companies, 7.51%. The

average effective interest rate was substantially lower for S&Ls than that for

commercial banks and mortgage companies in every month surveyed.

The data in Table 4 also show the impact of the flattening yield curve over the

last two quarters. S&Ls have traditionally originated a higher proportion of

ARMs than either commercial banks or mortgage banks, and this pattern persists.

Table 4: Mortgage Rates and Terms

(Conventional Home Purchase Mortgages)

(In percent)

Effective Rate Percent of Loans by LTV Class % Arms

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

S&Ls

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

Mar-98 6.96 24 46 14 16 36

Commercial Banks

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

Mar-98 7.22 15 34 16 36 9

Mortgage Companies

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

Mar-98 7.28 20 37 17 27 6

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

Research & Analysis 8 August 1998

However, while more than half of S&Ls’s originations are typically ARMs, by

March 1998, the percentage had fallen to just 36%. At commercial banks and

mortgage companies, the decline in ARM originations has been even more dramatic. Only 9% of the commercial banks’ and 8% of the mortgage companies’

originations were adjustable rate.

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 March 1998, the percentage of high

LTV-ratio mortgage originations was only 16% for S&Ls versus 36% 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, 70% of the originations have LTVs of less than 80%.

The corresponding percentage for commercial banks is 49% and 57% for mortgage banks.

Prepayments Accelerating

As Figure 3 showed, the difference between the one-year and the ten-year constant maturity Treasury interest rates have narrowed considerably. In addition, as

Figure 4 shows, long term mortgage commitment rates are approached the low

levels reached in 1993 at the peak of the previous refinancing boom. As Figure 6

shows, the three-month Conditional Prepayment Rate in March 1998 (20.24%)

was at its highest level since June 1994. The CPR has become the industry standard for quantifying prepayment activity and assumes that a constant fraction of

the remaining principal is prepaid. Accordingly, the three-month CPR measures

prepayments “conditional” on the previous quarter’s remaining balance. Unexpectedly high levels of prepayments lower 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.

Figure 6: Three-Month Conditional Prepayment Rate

0

5

1 0

1 5

2 0

2 5

3 0

3 5

4 0

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

(Source: Market Pulse, 3/98, MIC)
Mortgage Market Trends Volume 2 Issue 2

Research & Analysis 9 August 1998

Comparison of 1992-93 and Current Refi Booms

Figure 7 presents plots of U. S. Treasury yield curves for year-end 1992 and yearend 1993. Both yield curves are steeply sloped, particularly in the shorter-term

maturity segments. To provide a comparison, Figure 8 presents plots of the U. S.

Treasury yield curves for year-end 1997 and March 1998. In sharp contrast to the

1992-93 period, these yield curves are extremely flat. Differences in both the level

and slope of the yield curves in both refi periods account for the dramatically different refinancing activity exhibited by mortgagors.

Figure 7: U.S. Treasury Yield Curves, Dec. 1992 and Dec. 1993

3 .0 0

3 .5 0

4 .0 0

4 .5 0

5 .0 0

5 .5 0

6 .0 0

6 .5 0

7 .0 0

7 .5 0

0 6 0 120 180 240 300 360

Months

Yield

Dec -1993

Dec -1992

In the period 1992-93, refinancing activity was characterized largely by substituting 15-year fixed rate mortgages and adjustable rate mortgages for 30-year fixed

rate mortgages. This made sense given the very low rates on ARMs and the lower

rate on 15-year fixed rate mortgages compared to 30-year fixed rate mortgages.

This shift had a favorable credit risk effect. As reported in a previous issue of

Mortgage Market Trends and shown in Table 1 (page 3), the delinquency rate for 15-

year fixed rate mortgages is substantially lower than that for 30-year fixed rate

mortgages. Because most of the refinancing activity during the 1992-93 period

involved converting 30-year to 15-year fixed rate mortgages, mortgages originated

in both 1992 and 1993 have turned out to have the lowest overall default rates.

Figure 8: U.S. Treasury Yield Curves, Dec. 1997 and Mar. 1998

3 .0 0

3 .5 0

4 .0 0

4 .5 0

5 .0 0

5 .5 0

6 .0 0

6 .5 0

7 .0 0

7 .5 0

0 6 0 120 180 240 300 360

Mon ths

Yield

M ar-1998

Dec -1997

In the current period, however, mortgagors are doing just the opposite in terms

of their refinancing activity. They are substituting 30-year fixed rate mortgages
Mortgage Market Trends Volume 2 Issue 2

Research & Analysis 10 August 1998

for ARMs and shorter-term fixed rate mortgages in order to take advantage of

the historically low rates on 30-year mortgages and to protect themselves against

future interest rate increases. As such, the credit risk effects appear to be less

positive. While the shift from ARMs to fixed rate mortgages would tend to reduce future delinquencies, the decline in 15-year relative to 30-year fixed rate

mortgages would have the opposite effect.

To provide a sense of the difference in the levels of mortgage contractual interest

rates between the 1992-93 and current periods, Tables 5 and 6 report median

coupons, i.e., weighted average coupons or WACs, for fixed rate mortgages and

adjustable rate mortgages, respectively. These data are taken from Schedule CMR

(Consolidated Maturity Rate) filed by thrifts with OTS. Schedule CMR is part of

the Thrift Financial Report used by OTS to collect financial information from

thrifts. Because OTS began collecting CMR data in March 1993, the tables only

report data for the 1992-93 refi boom from March 1993 onward.

Table 5: Median of Fixed WACs for All Coupons

 (1992-93 Refi Boom and 1997-98 Refi Boom)

1992 - 1993 1997 - 1998

Mar-93 Jun-93 Sep-93 Dec-93 Dec-97 Mar-98

30-Year Mortgages 9.17 9.05 8.94 8.80 8.27 8.16

15-Year Mortgages 9.00 8.75 8.49 8.26 7.91 7.80

B a lloon Mortgages 8.87 8.69 8.50 8.34 7.91 7.80

Table 5 shows that the median WACs on fixed rate mortgages for all maturities

were substantially higher during the 1992-93 refi boom. This same result generally

holds for both current CMT and COFI adjustable rate mortgages, at least those

with relatively long reset frequencies. For ARMs with short reset frequencies, the

WACs tend to be higher for the 1997-98 refi boom than the 1993 period (the

teaser rates more directly reflect market prevailing conditions).

Table 6: Median of ARM WACs for All Coupons

 (1992-93 Refi Boom and 1997-98 Refi Boom)

Current Market Index ARMs Lagging Market Index ARMs

by Coupon Reset Frequency by Coupon Reset Frequency

6 Mo or Less 7 Mo to 2 Yrs 2 + Yrs to 5 Yrs 1 Month 2 Mo to 5 Yrs

199303 Teaser 6.12 6.12 8.38 6.66 7.08

Non-Teaser 7.08 6.97 8.98 6.32 7.93

199306 Teaser 5.83 5.73 8.00 5.89 6.71

Non-Teaser 6.91 6.70 8.68 6.06 7.71

199309 Teaser 5.50 5.50 7.74 5.64 6.41

Non-Teaser 6.69 6.48 8.43 5.88 7.38

199312 Teaser 5.37 5.36 7.29 5.27 6.17

Non-Teaser 6.58 6.39 8.16 5.70 7.20

199712 Teaser 6.75 6.62 7.39 5.26 6.76

Non-Teaser 7.91 7.95 7.8 6.44 7.49

199803 Teaser 6.89 6.62 7.37 5.02 6.75

Non-Teaser 7.89 7.91 7.73 6.43 7.48
Mortgage Market Trends Volume 2 Issue 2

Research & Analysis 11 August 1998

The two vastly different patterns in refinancing activity have very different implications for the credit and interest rate risk of thrifts and other mortgage lenders.

For example, one important adverse effect of the current type of refinancing activity on thrifts is that it may raise the interest rate risk for the industry if thrifts’

portfolios have fewer ARMs and more FRMs. There may be a tradeoff, however,

between interest rate risk and credit risk. The potential interest rate risk increase

(due an increase in asset duration) may be offset by a decrease in credit risk associated with the much lower default rates on 30-year fixed rate mortgages, although the gain in lower credit risk may be smaller than achieved during the

1992-93 refi boom.

To explore in more detail the different effects of the 1992-93 and current refi

booms on thrifts, we estimated simple regression models using key variables

from the OTS Net Portfolio Value (NPV) Model. Net Portfolio Value is defined

as the market value of assets less the market value of liabilities (including the net

value of off-balance sheet contracts).

We used a panel data set of approximately 450 thrifts from March 1993 through

March 1998 to estimate the regressions. A panel data set only includes those

thrifts that were in existence over the entire sample period. Separate regressions

were estimated for interest rate sensitivity and asset duration. The interest rate

sensitivity measure used in the regressions was taken from the NPV Model; it

gauges the magnitude of loss in economic value from a 200 basis point adverse

movement in interest rates. We included several variables in the regressions to

control for thrift size, regional location, the spread between the three-month

Treasury bill rate and ten-year Treasury bond rate (i.e., a measure of slope of the

yield curve), and separate dummy variables for the 1992-93 and current refi

booms.

The regression results provide empirical support for a couple of the assertions

made above. First, the 1992-93 refi boom was associated with a statistically significant decrease in thrift interest rate sensitivity, while the current refi boom has

resulted in a significant increase. This is consistent with the movement into

ARMs and shorter-term fixed rate mortgages in 1992-93, and the movement

back into 30-year fixed rate mortgages now. Second, there was a significant decrease in thrift asset duration in the 1992-93 period, and an increase, though insignificant, in asset duration in the current refi boom. Again, these results are

consistent with the pattern of refinancing activity in the two refi boom periods.

CONCLUSION

The effects of the 1992-93 and 1997-98 refi booms on thrifts have been much

different. Both credit risk and interest rate risk fell substantially during the 1992-

93 refi boom. This occurred because the dramatic fall in interest rates reduced asset duration and prompted homeowners to switch into mortgage products characterized by much lower default rates. As a result, the overall effect on thrifts was
Mortgage Market Trends Volume 2 Issue 2

Research & Analysis 12 August 1998

positive. In contrast, the net effect of the current refi boom is harder to determine. Interest rate risk has definitely increased, but the ultimate effect on credit

risk of the movement towards 30-year fixed rate mortgages will not be known

until the current refi boom ends.
Mortgage Market Trends Volume 2 Issue 2

Research & Analysis 13 August 1998

Mortgage Market Trends

Volume 2 Issue 2

August 1998

Data Appendix

National and Regional Trends in Mortgage Delinquency Rates

as of March 31, 1998
Mortgage Market Trends Volume 2 Issue 2

Research & Analysis 14 August 1998

Regional and State Analysis

Seriously Delinquent & Home Price Appreciation Rates as of 3/31/98

(Based on $)

MIC SD TFR SD Home Price Appreciation

Market Depositories 1-Year 5-Year

National 0.97 1.25 0.91 4.7 18.1

Northeast 1.24 1.64 0.91

Connecticut 1.18 1.40 0.77 4.8 3.4

Delaware 0.91 1.18 0.77 2.9 6.4

Maine 0.81 1.47 0.96 5.8 8.8

Massachusetts 0.66 0.85 0.47 6.0 17.2

New Hampshire 0.55 0.74 0.47 5.2 11.2

New Jersey 1.60 2.03 1.43 4.0 8.7

New York 1.55 1.80 0.85 3.6 6.1

Pennsylvania 1.10 1.57 0.85 3.4 10.2

Rhode Island 0.82 1.15 1.84 4.0 3.8

Vermont 0.52 1.00 1.90 2.1 5.7

West Virginia 0.34 0.77 0.87 4.6 25.8

Southeast 1.10 1.47 0.90

Alabama 0.63 1.27 1.01 5.4 25.6

DC 1.56 1.63 1.80 2.3 3.6

Florida 1.32 1.60 0.64 5.0 18.1

Georgia 0.85 1.16 0.74 6.2 25.1

Maryland 1.69 2.18 1.95 3.3 7.7

North Carolina 0.76 0.97 0.50 5.3 28.2

Puerto Rico 0.98 1.48 5.99 * *

South Carolina 0.90 1.05 0.46 5.8 23.7

Virginia 0.92 1.16 0.89 3.0 10.4

Central 0.63 1.15 0.65

Illinois 0.87 1.29 0.73 3.0 21.0

Indiana 0.63 1.18 0.81 4.4 28.0

Kentucky 0.40 0.86 0.70 3.4 28.4

Michigan 0.26 0.55 0.79 5.7 38.1

Ohio 0.59 1.15 0.56 3.9 27.8

Tennessee 1.14 1.74 0.51 5.5 31.9

Wisconsin 0.29 0.61 0.30 3.6 33.9

Midwest 0.64 0.88 0.64

Arkansas 1.07 1.91 0.57 3.4 26.8

Colorado 0.38 0.49 0.21 5.5 48.0

Iowa 0.27 0.43 0.77 3.6 29.7

Kansas 0.52 0.78 0.29 4.8 29.5

Louisiana 1.05 1.74 0.31 4.8 31.8

Minnesota 0.41 0.51 0.27 5.6 28.8

Mississippi 0.86 2.32 1.07 2.9 26.0

Missouri 0.48 0.71 0.46 3.1 23.7

Nebraska 0.26 0.41 0.67 4.7 32.9

New Mexico 0.69 0.89 0.89 2.6 32.4

North Dakota 0.47 0.59 0.43 4.1 28.8

Oklahoma 0.80 1.26 0.52 5.0 24.1

South Dakota 0.46 0.57 0.60 6.7 33.6

Texas 0.85 1.11 0.88 4.6 15.3

West 1.03 1.20 1.10

Alaska 0.39 0.86 0.10 2.8 21.3

Arizona 0.61 0.76 0.36 4.3 30.3

California 1.16 1.28 1.15 7.3 0.5

Hawaii 1.67 2.30 1.71 -1.9 -9.8

Idaho 0.68 0.85 0.19 3.4 33.7

Montana 0.64 0.89 0.62 4.2 39.8

Nevada 1.09 1.31 - 3.2 16.9

Oregon 0.35 0.38 0.55 5.2 51.4

Utah 0.62 0.93 0.82 5.0 68.4

Washington 0.61 0.71 0.31 6.0 24.6

Wyoming 0.39 0.49 0.20 5.4 40.6
Mortgage Market Trends Volume 2 Issue 2

Research & Analysis 15 August 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%

Mar-94 Sep-94 Mar-95 Sep-95 Mar-96 Sep-96 Mar-97 Sep-97 Mar-98

National NE SE Central Midwest West

Percent Home Price Appreciation

1997Q1 to 1998Q1

(Source: OFHEO Resale Database)

5.61 to 7.32 (9)

4.83 to 5.61 (11)

4.01 to 4.83 (9)

3.33 to 4.01 (10)

-1.95 to 3.33 (12)
Mortgage Market Trends Volume 2 Issue 2

Research & Analysis 16 August 1998

National Cohort Performance by Quarter of Origination

Percent Seriously Delinquent after 24 Months

(Source: MIC)

0

0 .2

0 .4

0 .6

0 .8

1

1 .2

1 .4

1 .6

M a r-93 Sep-93 M a r-94 Sep-94 M a r-95 Sep-95 M a r-96

O riginatio n Qua rter

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 Mar-98

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 Mar-98

Variable

Fixed