Mortgage defaults decline as economy turns good numbers

However, there are concerns about how long moderate default rates can continue

By Francis Monfort

20 Jun 2018

The rate of first-mortgage defaults dropped as economic conditions continued to be positive, according to the May Consumer Credit Default Indices released by S&P Dow Jones Indices and Experian.

The first-mortgage default rate declined by two basis points, to a level of 0.66% from 0.68% in April. Compared to the year-ago period, the default rate increased from 0.64%. The composite default rate also declined month over month to 0.89% in May from 0.92% in April. Compared to the May 2017, the composite rate increased from 0.86%.

"Consumers continue to pay their bills on time," said David Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices. "With the economy turning in good numbers with low unemployment, low inflation, and gradually rising wages, consumer credit default rates are flat to down. Consumer borrowing has recovered from the financial crisis. Mortgage debt outstanding fell 12.6% from its early 2008 peak to the bottom in 2014; now it remains roughly 6.1% below the peak.”

Default rates for other loan types also decreased in May. The bank card default rate dropped two basis points to 3.84%, and the auto loan default rate fell six basis points to 0.93%. The auto loan default rate has steadily fallen in 2018 and now is at its lowest rate since July 2017.

"Looking ahead, there may be some concern about how long the moderate default rates can continue,” Blitzer said. “Savings as a percentage of disposable income is declining. At the current level of 3%, it is near the low point seen in the boom before the financial crisis. While inflation remains low, wage growth is not very high and home prices are rising two to three times faster. Any rapid rise in defaults will wait for the next recession, whenever it comes."