'Red Flags' Are Seen

Sure, delinquency rates have been falling on a national level, but not everyone sees a picture of credit quality that is universally rosy.

McDash Analytics here, a company that slices and dices large pools of loan level mortgage data, notes that heavy refinancing activity in recent years has reduced the age of outstanding mortgages. Many have not yet entered their peak period of default risk.

"On an absolute basis, delinquencies remain low. But we all know that delinquencies ramp up," said Ted Jadlos of McDash Analytics.

He notes that the delinquency rate on loans originated in 2004 is almost as high as the overall delinquency rate for all loans outstanding, a fact that raises concern given how young that portfolio is. It suggests that the 2004 vintage could be a problem spot down the road.

The trend is true for both 30-year and 15-year mortgage loans originated in 2004.

And that may not be surprising, given that average credit scores declined slightly for loans made in 2004 and 2005.

"I think the big trend is that if '04 is already more delinquent than '03, that's a sign that something is happening in the industry," Mr. Jadlos said.

The improvement in overall industry delinquency rates reflects improvement in earlier vintages, he said.

Among the more troubling trends raised by the May 31 data, the delinquency rate for loans originated in 2004, with only an average of about 11 months of seasoning, is already higher than the delinquency rate for loans originated in 2003. The trend is widely true across a variety of product types.

As of May 31, 1.39% of 30-year fixed -rate home loans originated in 2004 were delinquent based on UPB, compared to 1.31% of 2003 loans. A similar pattern held true for 15-year fixed-rate loans, with 0.72% of the 2004 vintage being reported delinquent in May vs. 0.52% for the 2003 vintage. In fact, among the 15-year FRMs, even the nascent 2005 vintage is already seeing a higher delinquency rate than the 2003 vintage.

"Anyone who sees that the delinquency rate is higher in '05 than in '03 is going to say we should start paying attention to the delinquency rate," Mr. Jadlos said.

For conventional ARMs, the delinquency rate was 1.94% for the 2004 vintage vs. 1.62% for the 2003 vintage.

As of May 31, the delinquency rate on all conventional adjustable-rate mortgages and jumbo ARMs was higher than it had been a year earlier, despite improvement for most product types.

In evaluating delinquency data, Mr. Jadlos said lenders need to also think about the distribution of vintages in their portfolio, the geographic mix of the portfolio and the types of loan products they hold.

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