Delinquency Improvements Expected to Slow

While mortgage delinquency rates are expected to continue their decline to more normal levels next year, multiple factors will slow that drop from the pace seen in recent years.  TransUnion projected today that the mortgage delinquency rate will decline from its expected year-end 2013 level of 3.94 percent to 3.75 percent by the end of next year, a far shallower decline than has previously been the case.  At the same time the credit reporting company said credit card delinquencies will rise over the next 12 months.

While 2014 is expected to be the fifth straight year in which mortgage delinquencies have fallen, it would be the first year in which the negative change was smaller than the year before.  The year-over-year drop in delinquencies of 60 days or more accelerated from 6.40 percent in 2010 to 7.14 percent in 2011, 15.05 percent in 2012 and delinquencies are expected to be down 23.43 percent this year. These improvements started after two consecutive years, 2008 and 2009, of 50 percent increases in the 60 day rate.

TransUnion's group vice president of U.S. Housing Tim Martin said the company sees a few obstacles that will slow the delinquency rate's return to more normal levels. "The primary reason for the slowdown will be the pending rise in interest rates, which may hinder home sales while also blocking refinancing as an exit strategy for some mortgage borrowers. Additionally, foreclosure timelines continue to expand in many states, keeping longer vintage delinquencies in the system."

The national delinquency rate peaked at 6.93 percent in the first quarter of 2010 and since then has dropped every quarter except the last two in 2011.  While delinquencies are down nearly 41 percent from that peak to 4.09 percent in the third quarter of 2013, subprime delinquencies have dropped only about 15 percent from the peak of 42.96 percent in Q1 2010 to 36.56 percent at the end of the last quarter. 

Both the national delinquency and the subprime delinquency levels remain well above the earliest data TransUnion has available, respective rates of 2.23 percent and 20.52 percent in the second quarter of 2007

Martin said, "The encouraging story surrounding subprime delinquency rates is that most of the decline observed has occurred since the beginning of 2012. As interest rates stayed low, house prices started to rebound -- and that gave many subprime borrowers the option of refinancing or selling their way out of the delinquent mortgage before the logjammed foreclosure process caught up to them."

TransUnion is projecting the largest mortgage delinquency rate declines to happen in Nevada (-25.17%), Florida (-15.31%), Georgia (-11.74%), Michigan (-10.18%) and New Jersey (-10.17%). The biggest percentage increases are expected in North Dakota (+47.72%), Montana (+12.05%), Alaska (+11.70%), Hawaii (+7.35%) and Texas (+7.33%).

Martin noted that the four states that were hit the hardest by mortgage delinquencies and foreclosures have also shown the greatest improvement.  California and Arizona rebounded substantially this year but now there appears to be a shift with Nevada and Florida expected to see the biggest improvements in 2014. These four states played a major role in elevating the U.S. mortgage delinquency rate by more than 200% between 2007 and the start of 2010. While Arizona and California now have mortgage delinquency rates well below the national average, Florida and Nevada remain at elevated levels but, as such, should show above average improvement next year."

Credit card delinquency rates (the ratio of bankcard borrowers 90 days or more delinquent on one or more of their credit cards) are expected to rise nearly 10% from 1.51% in Q4 2013 to 1.66% in Q4 2014. Even with that increase, the card delinquency rate would remain far below average historical levels. Between 2007 and 2012, the credit card delinquency rate has averaged 2.38% during the fourth quarter.

"The credit card delinquency rate should remain relatively low next year," said Steve Chaouki, a co-author of several credit lending studies and group vice president in TransUnion's financial services business unit. "Delinquency has remained near all-time lows post-recession as lending to the subprime population was muted."