Default Risk due to Deflated Housing Market Loses Momentum

Mortgage lenders should closely monitor the Home Price Index and Core Mortgage Risk Index in 2009.




Looking back at 2008, there is no guessing as to why mortgage lending for many credit unions was tricky. With nationwide home prices continuing to deteriorate, and adjustable mortgages continually resetting on millions of homes which are now held with negative equity, it made managing a mortgage portfolio a daunting task even the most prepared credit unions.

Recently First American Corelogic released their 2008 recap on home prices, via the LoanPerformance's Home Price Index (HPI) which shows the 12 month change in home prices state-by-state. Additionally they also reported on overall mortgage risk indicators, especially as it pertains to home price declines. As expected, home prices in 2008 were abysmal. Additionally, as home prices initially had a corollary impact to mortgage risk, it now appears to be less important of an overall factor, whereas other factors are now more likely to impact mortgage default, such as unemployment and economic duress.

By The Numbers: Nationwide Home Price Recap of 2008

Based on November and early December home price data, First American Corelogic reported:

  • National housing prices fell 10.6 percent for the full year 2008: the largest decline in more than 30 years.
  • During 2008, home prices nationally declined between 10 and 11 percent every month except January.
  • November’s decline was 10.2 percent compared to a year earlier and early December preview data suggests declines continued in the 10 percent-plus range last month, according to First American CoreLogic’s LoanPerformance Home Price Index (HPI).
  • U.S. home prices peaked in 2006, since then they have declined 18.5 percent on a cumulative basis and are currently back to Spring 2004 levels.

Full year 2008 prices fell in 35 states, with California leading the way with a 26.9 percent decline, followed by Nevada (-22.8%), Arizona (-19%), Florida (-18.2%), and Rhode Island (-13.7%). Since home prices peaked in July 2006, home prices in California have declined 42 percent on a cumulative basis since their most recent peak, followed closely by Nevada (39%). Prices in Arizona and Florida have declined by 33 percent cumulatively.

"We also saw that in 2008 the number of total unique foreclosure filings increased to 3.4 million, up 76 percent from 1.9 million in 2007 and more than triple the 1.1 million filings in 2006," stated Mark Fleming, Chief Economist for First American Corelogic.

First American Corelogic is one of the largest providers of household level mortgage and property data covering 3,050 counties nationwide. They have more recently gained popularity in the credit union banking world for its ability to provide information and analytical services to credit unions who are experiencing distress or lack of transparency in their performing and non-performing mortgage and home equity portfolios. Additionally, they provide predictive analytical indicators which have multiple, more granular, variables measuring the market according to specific housing segments and micro-market locations versus other indices and researchers who focus on a more general analysis.

Collateral Risk Now Depends on the Economy

Collateral risk continues to depress the housing market with the top four states for price depreciation accounting for nearly half of all outstanding foreclosures. But economic risk is also rapidly rising: California, Nevada and Rhode Island stand out as being among the top 10 states for both price depreciation and highest unemployment. Until home prices and economic activity stabilize, mortgage distress will remain high.

The information from First American Corelogic shows that the likelihood that homeowners will default on their mortgages increased by 12 percent from a year ago and is up 54 percent from early 2002.

The rate of home price decline, an important factor in assessing likely delinquency risk, has stabilized at around 11 percent, with almost zero acceleration in either direction. Because this rate is not increasing, home price declines are not raising the national risk index further at this time, but they’re not reducing the risk either. While the risk index has been driven upward throughout 2007 and 2008 primarily by the acceleration of declines in home prices, there is now a geographic expansion of risk driven by fundamental economic conditions. Flat or declining wages and increasing job losses are beginning to affect the index more heavily in many markets.

Credit unions should refer to detailed geographic breakdown of home prices and mortgage risk for their local markets. This information is increasingly important to credit unions who have in years past originated both mortgages and home equity products for portfolio. In 2009, these two figures should be closely monitored by mortgage lending credit unions to continually control existing and newly originated mortgages and home equity loans.




Feb. 2, 2009



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