By Cameron Polo
*This is part of a series. Click here to read the previous article.*
Delinquency rates provide important insights into the causes, and the severity, of the 2007-09 Global Financial Crisis (a borrower is delinquent when they are behind on one or more monthly mortgage payments). As the graph below highlights, there were significant differences between the delinquency rate for prime and subprime borrowers in North Carolina in the years leading up to the crisis.
The subprime delinquency rate will always exceed the prime delinquency rate because subprime borrowers are, by definition, a greater credit risk. However, the graph above reveals a dramatic increase in the prime delinquency rate in North Carolina between 2000 and 2010. At the start of the decade, the prime delinquency rate hovered around 2%. By the end of the first quarter in 2010, this number had gone up by 330%, peaking at just under 7%. This increase reflects the erosion in underwriting standards during the housing boom, aided in part by Fannie Mae’s and Freddie Mac’s policy choices to ease their conforming loan limits, as well as the widespread economic harm created by the crisis.
The change in the subprime delinquency rate between 2000 and 2010 is interesting for several reasons. First, subprime delinquencies actually increased in the early 2000s before coming back down, dropping about 6% between the end of 2002 and the midway point of 2004. This decline likely reflects greater availability of mortgage credit, fueled by rapid growth in house prices, which allowed subprime borrowers to refinance their mortgage more easily if they had trouble making their payments. But, once the housing bubble burst, subprime borrowers could no longer refinance a mortgage that was unaffordable, and the delinquency rate skyrocketed, reaching 28.39% in the first quarter of 2010. Despite this increase, the total delinquency rate for all borrowers follows a similar trend as the prime delinquency rate, reflecting the fact that the vast majority of mortgage loans are to prime borrowers.
In addition to the overall delinquency rate, the delinquency rate by time overdue provides helpful insights into the severity of the delinquencies experienced by borrowers, and the crisis as a whole.
Pre-crisis, the vast majority of delinquent borrowers were between 30 to 59 days behind on their mortgage payment, likely meaning they had missed just one payment. When the housing bubble burst, the number of borrowers more than 90 days past due spiked, while the number of borrowers delinquent for less than 90 days barely moved. The jump in the 90 day past due bucket reflects the severity of the crisis and the survey methodology. Because the survey takes place quarterly, or once every three months, a mortgage borrower could go from current to the 90+ day category between surveys. In the midst of rapidly rising unemployment and bankruptcies, borrowers quickly fell many months behind, and the rate of borrowers more than 90 days past due went from about 1% in 2007 to over 4% in 2010. Next, we examine why so many borrowers went from paying their mortgages on time to defaulting in such a short period of time.