SubscribeWhy Borrowers Default – Interesting Reading
June 5, 2009
I saw this on a blog on the Wall Street Journal, but a recently released paper by the Federal Reserve Bank of Atlanta looked at loan defaults on loans with a high mortgage payment to income ratio, and found that rising interest rates DID NOT significantly correlate to default rates.
The two main indicators of a borrower’s likelihood of defaulting were (drumroll please . . . ):
- Unemployment
- Declining future home prices
Uh, oh, that sounds familiar here in Silicon Valley where unemplyment is 10.9%, and home prices in even the most resilient neighborhoods are off 10%. The article goes further to quote some numbers from the study:
“The Fed paper estimates that a 1-percentage-point increase in the unemployment rate boosts the chance of a 90-day delinquency by 10%-20%, and a 10-percentage point fall in house prices raises the probability of a default by more than half. A 10-percentage-point jump in the debt-to-income ratio, meanwhile, increases the chance of a 90-day delinquency by 7%-11%.”
So, the 5% increase in unemployment over the last 18 months translates to a 50% increase in the likelihood of default. The 10-20% drop in local housing prices translates to a 14% – 22% increase in the likehood of default. Wow . . .
Thursday’s announcement that delinquencies and foreclosures have hit all time highs underscores the relevance of this study. The authors of the Fed paper recommend programs to assist borrowers who have lost their jobs get through their temporary economic challenge. The WSJ authors have an alternative solution; boosting short sales to get borrowers out of their homes.
Which do I think will come to pass? Well, I have been getting training on short sales the last couple of months, and I have already seen two short sale listings in Los Altos this month.
Read it at the source. Here is the WSJ blog article, and HERE is the Fed paper. Read ‘em and weep.
Thanks for reading . . .
