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Moody’s: Mortgage delinquencies are on the rise

Loosening underwriting standards and slowing home price growth will play a role

Loan delinquencies for household debt have remained consistent over the past year, but Moody’s Investors Service predicts this is about the change.

A report released this week by the Federal Reserve Bank of New York revealed that the rate of delinquencies was steady at 4.65% in the last quarter, but Moody’s says this is a cycle low that will change in the coming quarters as loosening underwriting standards and rising interest rates impact loan performance.

Moody’s predicted that total household debt, credit card debt and mortgage debt would increase modestly in the coming year, while auto debt – which has reached record levels according to the NY Fed report – will remain stable.

New residential mortgage delinquencies clocked in at 3.55% last quarter, up 15 basis points from last year, Moody’s said, calling this trend consistent with its prediction that delinquencies are on the rise.

“We expect mortgage delinquencies will increase modestly over the next year given easing underwriting standards and since slower home price appreciation will more than offset strong employment conditions,” the report stated. “We expect rising interest rates will take longer to result in higher mortgage and auto loan delinquencies since existing loans are largely fixed rates.”

Balance growth for residential mortgages slowed from last year, falling from a rate of 4.7% year over year in the fourth quarter of 2017 to 2.7% in Q4 2018. Moody’s said this slowdown helped temper the overall rate of household debt in the last year.

But Moody’s said it expects mortgage balances to grow in the year ahead.

“We expect residential mortgage originators to loosen underwriting standards for purchase loans, which will lead to modest growth in residential mortgage balances,” the report stated. “With interest rates up and refinance volumes down, originators are pressed for volume.”

Moody’s said a loosening in underwriting standards is inevitable in the current climate.

“Over the last year, residential mortgage loan profitability has declined significantly as loan originations and margins have fallen given higher interest rates, and as refinance originations have plummeted,” the report said. “Therefore, we expect residential mortgage underwriting to continue loosening modestly over the next 12-18 months.”

The Moody’s report said that as lenders gradually loosen underwriting standards that were exceedingly tight following the financial crisis, consumers could be at risk.

“Although consumers’ financial health is generally strong, there is a risk that they will take on too much credit in the present accommodative environment,” Moody’s stated.

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