Home Equity Delinquency Trend Could Portend Beginning of Reversal
The latest Home Equity Index Composite, maintained by Moody's Investors Service shows both great news and only-good news with the declining rate of U.S. home-equity sector charge-offs and seriously delinquent home loans.
Charge-offs in the home-equity sector continued to fall at a rapid pace during August 2005 with a 39% year-over-year decline, according to Moody's and its most recent HEIC.
However, the rate of improvement in serious delinquencies - that is, 60 days and over past due - has not kept pace. Compared to last year, the number of serious delinquent loans decreased by only 13%.
For September 2005 and comparing to the same month last year, performance associated with the home-equity sector remained strong. Serious delinquencies declined 6%, down from 7% one year ago. The annualized charge-off rate has declined to 0.7%, an improvement from the mark of 1% posted last year.
Delinquencies of 60 to 89 days in September 2005 actually rose, according to the HEIC. The delinquency rate for the 60-plus-day category went to 1.06% in September 2005, compared to the 0.98% rate in the same month a year prior.
According to Moody's, this trend could be early evidence of a potential shift in the performance associated with the home-equity sector. Factors such as the potential payment shock associated with many of the hybrid Adjustable-Rate Mortgage loans originated over the past couple of years, higher mortgage rates and the availability of affordable products could all play a role in reversing the home-equity sector's strong performance over the past couple of years.
The HEIC tracks the aggregate performance of the home-equity loans backing securities rated by Moody's. It tracks all product lines included in three subindexes - subprime, high loan-to-value, including non-Title I or "conventional" home improvement loans, and traditional home equity, including both closed-end home-equity loans and HELOCs, as well as certain home-equity products, such as Title I loans, which are categorized as "others."
The subprime subindex represents the largest part of the index and has represented more than 80% of the total since 1997. The traditional home-equity subindex is the second-largest category and the HLTV subindex is the third largest. The "other" category represents a tiny percentage of the total composite index.
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