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Sam Gendusa March 11, 2019

Newsletter - March 2019

Mortgage delinquencies across the United States hit a 19-year low in the fourth quarter of 2018, according to the Mortgage Bankers Association.

The delinquency rate for all single-family mortgage loans dropped 41 basis points from the third quarter and 111 basis points from a year ago, to 4.06%. In fact, delinquency rates across all types of loans have dropped:

Conventional loans: 3.19% (down 37 basis points from the third quarter and 100 from a year ago)

FHA loans: 8.65% (down 31 basis points from the third quarter and 173 from a year ago)

VA loans: 3.71% (down 45 basis points from third quarter and 78 from a year ago)

A higher delinquency rate among FHA loans is to be expected, since those borrowers generally have lower credit scores and higher debt-to-income ratios. But 8.65% is still a vast improvement from a decade ago, when it was around 14%.

Even among states affected by natural disasters, the delinquency rate improved in the fourth quarter.

So, what’s behind the drop?

A few things, including a steadily falling unemployment rate, an improving economy, and mortgage interest rates that are still below historical averages. Regulations in place since 2010 that require lenders to screen out high-risk borrowers also likely play a part.

“Mortgages originated in the past several years under strict federal rules constitute what lenders and investors call ‘the cleanest book of business’ they’ve seen in many years,” writes Kenneth R. Harney in the Washington Post.

“If the lending industry begins to relax underwriting standards in any significant way to dig deeper into the pool of riskier credit applicants to pump up their volume of home-purchase mortgages, it’s inevitable that delinquencies will rise.”

And there’s evidence that this is already happening, Harney says. Fannie Mae has increased its debt-to-income ratio from 45% to 50%, and the FHA is approving borrowers with lower average credit scores and debt-to-income ratios well above 50%.

While that may increase the likelihood of delinquencies, it also helps people who are less qualified borrowers to become homeowners. Here’s hoping the industry is able to strike the right balance.

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