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Mortgage Borrower Risk Profiles, Delinquencies, and Interest Rates in 2005–2008

Mortgage risk, delinquency, and interest rates have become a critical issue for both lenders and borrowers. To help assess these metrics, we released the following brief.

Executive Summary

Mortgage Borrower Risk Profiles, Delinquencies, and Interest Rates in 2005–2008 is the third report in a series of Consumer Finance Research briefs based on information derived from Ohio State University’s Consumer Finance Monthly (CFM) survey.

The CFM data are generated through a continuous monitoring survey of consumer households and their financial conditions. Since its official launch in February 2005, the Center for Human Resource Research (CHRR) at Ohio State University has been collecting CFM data through a monthly 25-minute telephone survey utilizing random-digit dialing and weighting procedures to ensure a statistically valid, nationally representative sample of U.S. adult consumer households. Data collected since CFM’s inception total over 14,000 observations as of year-end 2008.

What is the research about?

This research brief includes a high-level marketplace analysis of mortgage pricing strategies, a review of delinquency rates across borrower characteristics and demographics from CFM survey data from the 2005–2008 period, and strategic implications for credit unions.

The analysis of Mortgage Borrower Risk Profiles, Delinquencies, and Interest Rates in 2005–2008 seeks to explore the following research questions:

  • What might a simplified mortgage pricing model look like?
  • How do delinquency rates vary across borrowers’ financial characteristics?
  • How do delinquency rates vary across demographic groups?
  • Did mortgage pricing based on rising house prices contribute to delinquencies?
  • How can both underpriced and overpriced mortgage loans be avoided?

What are the credit union implications?

The ongoing mortgage crisis provides a painful reminder that financial institutions cannot assume that the low delinquency rates they face during economic expansions will continue indefinitely. As this brief points out many financial institutions underpriced mortgages in the mid-2000s. The interest rates they charged were not enough to cover eventual loan losses. These mounting losses, and the uncertainty surrounding their eventual size, mean that many of our financial institutions are in deep disarray.

The temptation during a housing crisis, understandably, is to err on the side of extreme safety. Many financial institutions will try to avoid underpricing mortgages in the future by charging interest rates that reflect today’s delinquency rates, or by rejecting more loan applications altogether. However, credit unions in particular need to approach such measures with caution, and to recognize the opportunity to serve members and respond to consumers.