"The economy is contracting, we see that, but the combination of supply chain issues and the first inflation we've had really in 40 years is making it difficult to use former models and examples of how things have evolved in the past.Wholesale cash distribution in the futureįinancial market infrastructure supervision "The old playbook, going back to 2008 and before, is hard to apply now," Earle said. He noted that the country is still absorbing the shock of COVID-19-related closures as well as record fiscal and monetary responses to them. However, it is tough to predict how consumers will behave or markets will react under the current economic conditions, Earle said. That has changed in recent decades, he said, as consumers have begun to prioritize paying their credit cards, which come with immediate penalties for nonpayment, over mortgages, which can go unpaid for months before foreclosure becomes an option. Peter Earle, an economist with the American Institute for Economic Research, said historically, housing costs were viewed as the top priority for households when it came to servicing debts. In contrast, student loan delinquency spiking didn't happen until later, since it can't be discharged, and is slower to decline." In previous stress, credit card delinquency rose slightly later than mortgages, but essentially coincident. "So when households have to decide, it's interesting what they prioritize. "There is definitely co-movement between delinquencies for mortgage debt versus other credit, but the patterns are different," Tang said. Tang noted that while delinquency trends for various types of credit are often similar, they do not necessarily move in lockstep. "Revolving home equity delinquencies have already shown slight signs of moving up." "This phase of mortgage delinquency is especially worrying because didn't go up during COVID as it did for credit cards, and the emergency phase of COVID is over so no one is expecting another phase of mortgage forbearance," said Derek Tang, co-founder of the Washington-based research firm Monetary Policy Analytics. Still, an uptick in mortgage delinquencies is often correlated with missed payments on other credit products commonly offered by banks, including credit cards, auto loans and home equity lines of credit. Also, banks have largely pulled back from mortgage lending during the past decade. So, this may just be the beginning of the first signs of the recession that many see coming."įHA-backed loans have little direct impact on bank balance sheets because they are insured by the federal government. If we had good eviction and rental delinquency data that had extensive coverage, it would start to mirror the same thing. "It's somewhat a proxy for what's going on among renters as well. "FHA borrowers are those that are most exposed to the labor market among homeowners," he said. Rental market trends would provide better insight, he said, but that data is tracked locally and is often reported on a lagging basis. Calabria suggested the trend could reflect labor conditions not incorporated into employment statistics, such as reduced hours.Ĭalabria said FHA delinquencies provide the closest-to-real-time indication of how labor market trends are affecting low- and moderate-income households. The overall delinquency rate for FHA loans was nearly 8%, compared with roughly 3% for loans backed by the Department of Veterans Affairs and less than 1% for loans backed by the government-sponsored enterprises Fannie Mae and Freddie Mac.Įxperts have attributed this uptick to a depletion of pandemic-era savings, the end of certain COVID-19-related support programs and protections, and the impact of inflation on household budgets. 1, up nearly a full percentage point from the summer of 2021 and well above its pre-pandemic rate of 0.5%. The early payment default rate among FHA borrowers was 1.7% as of Oct. FHA is the canary in the coal mine for the mortgage market." "This is the part of the mortgage market to watch. "If the consensus prediction of a global recession is true, we're going to start to see cracks somewhere in the labor markets, it's not going to be all at once," said Mark Calabria, former director of the Federal Housing Finance Agency and current senior advisor for the Cato Institute. Because of this, some economists and housing policy experts believe the increase in early defaults could be an indication of weakness in the labor market - such as cutbacks on hours - that has not yet been reflected in the unemployment rate, These vulnerabilities make FHA borrowers acutely sensitive to changing economic conditions. They often carry more debt, have lower incomes and are less able to build up savings than other types of mortgage borrowers. Among homeowners, FHA mortgage holders tend to have the least financial security.
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