What High Mortgage Delinquency Rates Can Tell You about the Mortgage Industry

Mortgage delinquency rates are highest in an economic recession. Delinquency occurs when borrowers cannot make monthly payments, which is usually the result of a loss of income. Historically, this was the primary reason for delinquency and default. In the late 2000s, however, a new reason for high delinquency rates came into the picture: bad mortgage loans. Delinquency was often the result of bad lending practices and not just individual borrowers losing their jobs or mismanaging their money. Analyze the current delinquency rate against other factors to determine whether the cause is the job market or the mortgage market. 

Job Market Causes Delinquency

The unemployment rate is perhaps the greatest indicator of the state of the job market and the economy as a whole. If the unemployment rate is high, you may surmise that joblessness is the leading cause of delinquency. A high unemployment rate typically occurs in a time of economic recession. Other indicators a recession could be at fault include low home prices, a low national prime interest rate and a high inflation rate. When mortgage delinquency is high among these factors, the mortgage industry itself may not be at fault.

Mortgage Market Causes Delinquency

Poor lending practices can be a source of delinquency to the same extent as any other economic factor. To determine if the mortgage industry has a role in causing high delinquency rates, consider the following factors: number of subprime loans extended, number of jumbo loans extended, average down payment required on a mortgage loan and number of new homes under construction. If lenders are providing a lot of subprime and jumbo mortgage loans, you will notice a pattern of irresponsibility among those lenders. This can come hand in hand with low down payment requirements. Since there is a high demand for homes when loans are easy to get, there will also be more new homes under construction.

Combination of Factors Causes Delinquency

The mortgage market and lending industry are so tied to the general economy that a mortgage market collapse and recession will nearly always occur concurrently. When they do, the rate of mortgage delinquency will reach extreme highs. This is what occurred in the late 2000s. Home lenders handed out bad loans. When these loans fell into default, the chain reaction of events included everything from a detrimental effect on the car industry to a crippling drop in the financial markets. In the future, the mortgage industry and general economy will continue to be intertwined.

Avoiding Delinquency

When you see a high rate of delinquency in the current market, consider how this may affect any loan you take. First, you will likely need a large down payment, perhaps 20 percent, in order to secure a home. You will face tougher credit requirements as well. If you can secure a loan in these conditions, though, it may be a great time to buy. When there is a high amount of delinquency, there are a number of homes for sale at very good prices. Be careful purchasing any home out of foreclosure or through a short sale as it may be under-maintained, but do not be afraid to capitalize on this negative market situation.