Modelling delinquency deluge


Modelling delinquency deluge

Mortgage market advisers and consultants are struggling to find any models that work for the current crisis but they are telling clients that they should prepare for a worst case scenario in mortgage market and securitisations of mortgage assets.

“Our clients are modelling a range of scenarios but are preparing themselves for the worst case including sustained levels of unemployment. Hopefully it won’t be that bad, but they need to prepare themselves,” says Bernadette Kogler, chief executive officer of RiskSpan, a Washington, DC-based analytics and modelling firm which has particular expertise in mortgage markets.

Riskspan clients include firms prominent in the mortgage securitization industry, such as lenders and servicers like Wells Fargo and Flagstar, as well as Fannie Mae and Freddie Mac. It also has clients on the buy-side, such as Barings, Northern Trust and Fidelity.

Both buy-side and sell-side clients are struggling to assess what the economic devastation of the last two weeks, with more to come, will mean for the MBS markets.

The “worst case” could be very bleak indeed. Economists at the Federal Reserve Bank of St Louis have predicted that the dislocation elicited by COVID 19 could cause 47m job losses in the US. This translates to an unemployment rate of 32% - comfortably worse than the rate of 25% recorded in the Great Depression of 1930-33.

Other economists are not quite so pessimistic, but Kogler agrees and she is advising clients to prepare for an unemployment rate of 30% in the worst affected regions of the USA. Las Vegas, Nevada, for example, is particularly exposed to the collapse of the hospitality industry, while Texas has been hit with a double whammy of a Coronavirus lockdown and a precipitous decline of oil and gas prices.

Metropolitan Las Vegas has a population of over 2.5m while the state of Texas is home to over 12.5m people.

An unemployment rate of 30% could lead to a mortgage delinquency rate of around 30%. Data provided by the Bureau of Labor shows that the correlation between unemployment and mortgage delinquency is very high - virtually 1:1. So, for example, both unemployment and mortgage delinquency peaked at around 10% in the Great Recession.

At the moment, a delinquency rate of 10% looks a lot better than what might be seen in a few months from now. Of course, foreclosure rates will be substantially lower than delinquencies, but if delinquencies do hit 30% foreclosures might be as high as 30%. The effect on the MBS market, both agency and non-agency, of delinquency rates of this magnitude is hard to over-estimate.












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