Today’s ARMs Have Lowest Delinquency Rate

In a previous blog, Is the Adjustable-Rate Mortgage Making a Come Back, we learned that adjustable-rate mortgages (ARMs) originated currently have lower credit risk characteristics than ARMs of a decade earlier, and have lower risk attributes than today’s fixed-rate mortgages (FRMs). As an extension to that, this blog explores and discusses trends in the default experience over time for ARMs and FRMs.

The CoreLogic Loan Performance Insights Report analyzes mortgage performance for all home loans. Based on this report, the serious delinquency rate for June 2017 was 1.9 percent, representing a 0.6 percentage point decline in the overall delinquency rate compared with June 2016.[1] However, the report does not provide delinquency rate by product type or by loan vintage (origination year).

As of June 2017, the serious delinquency rates for ARMs and FRMs were 5.2 and 1.8 percent, respectively (Figure 1). The serious delinquency rate dropped significantly for both FRMs and ARMs in June 2017 compared with June 2016 and the rates are near a 10-year low. CoreLogic data also shows the serious delinquency rate for ARMs is almost three times higher than the serious delinquency rate for FRMs.

A closer look reveals that today’s delinquency rate for both ARMs and FRMs is heavily influenced by older loans. The bulk of the loans for both ARMs and FRMs that were seriously delinquent were originated between 2003 and 2008 (Figure 2). More than 90 percent of the ARMs that were seriously delinquent in June 2017 were originated between 2003 and 2009 compared to just 3 percent of seriously delinquent ARMs originated between 2010 and 2017. Similarly, 61 percent of the FRMs that were seriously delinquent were originated between 2003 and 2009 compared to 28 percent originated between 2010 and 2017. Because today’s delinquency rate is heavily influenced by loans made before 2010, it can be a misleading guide of how newer ARMs are performing relative to FRMs.

Figure 3 compares the serious delinquency pattern for ARMs and FRMs by origination year. Each line in the figure represents the serious delinquency rate for all conventional loans originated in a given year as a function of number of months since the loan was originated. Analyzing these vintages imparts three important trends. First, delinquency rates were higher for all loans originated between 2006 and 2008. Performance of both the ARMs and FRMs started to improve gradually beginning with the 2009 vintage as the underwriting standards tightened and the economic recovery began mid-2009.[2] Second, loans originated in 2016 have performed the best, with the lowest 15-month delinquency rate in a decade. Third, the delinquency rate for ARMs was higher than FRMs for loans originated before 2010, but the pattern was reversed beginning in 2010 as the riskiest ARM products, such as the option ARM and the interest-only ARM, largely vanished. The Ability-to-Repay and Qualified Mortgage (QM) standards have generally eliminated such risky products. The QM regulation requires ARMs be underwritten to the maximum interest rate that could be applied during the first five years of the loan, eliminated negative amortization, and set standards for computing the debt-to-income (DTI) ratio.

CoreLogic compared the delinquency rate for different subsets of ARMs and FRMs, such as by loan-to-value ratio (LTV) buckets, loan purpose and property type. The results were similar to those shown in Figure 3, underscoring that the performance of post-2009 originations, for both ARMs and FRMs, has been strong, and that recent vintage ARMs appear to have had even lower delinquency rates than FRMs.

[1] Serious delinquency is defined as 90 days or more past due or in foreclosure proceedings.

[2] The National Bureau of Economic Research has identified the January 2008 through June 2009 period as an economic recession, and recovery began July 2009; see http://www.nber.org/cycles.html.

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