WEST PALM BEACH, Fla. – Take a high rate of home ownership, made possible in some cases by liberal programs intended to help people into their first homes. Combine with a sluggish economy and rising unemployment. The result, according to some observers, is a recipe for rising mortgage delinquency. The FDIC points out subprime lending activity has been growing. In 2000, 13% of all new mortgage loans were subprime, up from 5% in 1994. The FDIC noted marginal borrowers could be affected if the economy continues to slow. Another point bringing frowns to some faces: more than 20% of all mortgages written in 2000 were for more than 90% of the value of the house. That meant such loans had almost tripled since 1990. Mark Zandi, an economist with Economy.com in West Chester, Pa., is one of those concerned. Granted, he says, liberal programs have helped the American dream of home ownership come true for many people. In fact, figures from HUD show homeownership at a record 67.5%. Now we're seeing the dark side, he warns. Many people who qualified under easier underwriting standards simply won't be able to make their mortgage payments in today's economy. "The FHA program in particular has been under a lot of stress," Zandi says. "Delinquency rates among low-income households are in the double digits. They have risen considerably over the past year. I think it's indicative of a high level of stress among lower-income households. "Delinquencies and losses on sub-prime mortgage loans have also risen considerably. Many of these loans to people with blemished credit histories are to lower-income households, so it's also indicative of a lot of stress among these households." It's directly related to the nation's economic health, Zandi continues. The number of jobs has shrunk and unemployment has risen. That has been generally true across the country, although the industrial South and parts of the Midwest have been hit particularly hard. What does this mean to lenders such as credit unions? "It means you should probably be more cautious in extending credit, particularly to households with blemished credit histories and lower down payments," Zandi suggests. "I would argue for a little bit stiffer underwriting standards. I do think credit conditions will continue to erode, even if the economy stabilizes over the next couple years. It will be a more difficult time to make money in the mortgage industry, whether you're a bank or credit union." Even if the economy doesn't fall into a full-blown recession, Zandi believes the lowering of underwriting standards over the past couple years has laid the groundwork for a difficult time for lenders. "Credit conditions are eroding. A lot of credit has been extended to homeowners. Some of that is going to come back in the form of losses," he predicts. "It's not time to batten down the hatches, but at least it's time to see if all the windows are in place. Risk-based pricing is the way to go, both from the lender's and the borrower's perspective. When you do it properly, you're able to extend more credit to people than would otherwise be the case. From the lender's viewpoint, it leads to higher profitability. I think it's a win-win. I don't know why anyone would feel otherwise." That higher profitability could be important. According to figures just released by the Mortgage Bankers Association of America, return on equity fell to 15.8% last year from 19.1% in 1999. There was at least one bright spot. Profitability from servicing mortgages rose to $309 per loan last year, up from $295 a year earlier. Another more positive note comes from Ross Waldrop, senior financial analyst at the FDIC. "We haven't seen the charge-off rate going up on residential mortgage loans at commercial banks or savings institutions," he says. "The dollar amount certainly is going up because the total amount outstanding is going up. But the percentage that are defaulting in dollar terms has really not changed from what it was basically last year – about one-tenth of one percent for commercial banks and .04% for the savings institutions." Waldrop says his data does not go into detail on specific market segments, such as subsidized loans or homeowner income levels. "Ours are weighted averages. We take the total amount of chargeoffs divided by the total dollar amount of mortgages on the books. Bill Gates mortgage is going to count probably 100 times as much as somebody else's. So there will be a little bit of a skewing there. The dollar amount charged off has been going up, but it's been going up on a consistent basis as the volume of lending has been going up," he explains. Waldrop also notes the FDIC data offers a look at the past. A charged-off loan is the culmination of a process that began weeks and months earlier. "The general sense I get of the mortgage market is because of the number of players in the market, and the transparency of pricing on the Internet, the market is very competitive. Spreads are very thin," he says. "Traditionally mortgage loans have fairly low risk in terms of historic lost rates. The losses are well below most other loan categories. Yet default rates do go up in recession. When spreads are thin, lenders have to be careful they don't fall below the break-even point on a risk-adjusted basis. If you're making a nominal one percent spread, out of that one percent you have to cover the risk of default and the risk that while that mortgage doesn't reprice your deposits and overhead costs will." -

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