Thursday, February 26, 2015

Housing Tax Policy, A Series: Part 13 - The Crisis Timeline with Lending Standards

Here is one more graph.  This one includes lending standards.

As with the previous posts, here again we see credit and pricing pressures first, followed by rising delinquency.  (Here is a set of slides from the Richmond Fed, with delinquency broken out by mortgage type.  It looks like the same story to me.  Subprime delinquencies are higher in general than other mortgage types.  But, it looks to me like all mortgage types had delinquency rates that crossed above the previous average levels in about 2Q 2007.)

Loan to Value was rising during this period, but FICO scores remained stable, even on (pdf) subprime loans.  Low equity could plausibly lead to more systemic risk in a downturn.  On the other hand, by 3Q 2008, home prices had already declined by more than 20%, so even a 20% down payment would not have served as full insurance.  And, even by then, delinquency rates were less than halfway to their eventual peaks.

The same Federal Reserve paper that mentions the FICO scores also notes that investor buying didn't appear to accelerate as a proportion of subprime & Alt-A loans in the 2005-2006 period.  That is surprising to me after my findings from the Survey of Consumer Finance data.  But, we should keep in mind that these loans were increasing as a proportion of all mortgages, so investor mortgages as a proportion of all mortgages would have been rising strongly.  These loans are also more likely to engage in a tactical default if property values fall.

So, we have 3Q 2006, when the Fed finishes hiking the Fed Funds Rate, but pegs it at a level even higher than long term rates, which, according to a well-known Fed model, is a yield curve characteristic that tends to portend recessions.  In the same quarter, mortgage loan growth begins to sharply slow, and home price growth turns negative.

The next quarter, banks report tightening standards on mortgages.  (The graph is a little messy because the bank lender series were re-categorized in 2007.)

Then, in 2Q 2007, delinquencies rise above the average for the previous decade for the first time.  The rise in delinquencies is a mirror image of the decline in home prices.

I have included Banking standards on Consumer Loans in the graph, too.  This is one indicator that does tend to lag the problems in the home market.  I would have pointed it out as evidence in favor of my narrative if it had led or been concurrent with the housing indicators.  But, it didn't.  So, I can't.

But, generally, I consider this to be more evidence in defiance of the narrative that default rates on toxic mortgages to low income homeowners who couldn't make the payments were the causal factor here.

No comments:

Post a Comment