I read earlier this week that there was an increase in GNMA delinquencies over three payments due. While our data shows this to be true, the underlying implication that there is a growing credit risk may be false. 

Over the last three months delinquencies have dropped for all categories except for > 3 months delinquent. The > 3 months category differs from the others in that it is not transitory. For months 1, 2 and 3, a loan can only stay in it for one month. If it was one month delinquent last month, it must be in the 2 months category this month. That does not hold true for the > 3 category. As loans enter this category, they remain there until they either become current (unlikely at that point) or are liquidated. Given lengthy liquidation timelines, and given that almost half of these > 3 months delinquent loans are on properties in judicial states, we estimate that they could reside in this category for approximately 288 days. Accordingly, this > 3 category grows/shrinks not just on the basis of changing credit dynamics but on changing liquidation timelines. The growth of loans in this category does not necessarily translate to increased credit risk in our portfolios.

Another favorable factor is that we are seeing a small improvement in delinquency migration statistics for the Ginnies.  As can be seen above, the probability that a government loan that is current migrating to one month delinquent is 1.7%, down from 2.0 % last quarter.  Likewise, the current probability that a loan, already one month delinquent migrates to two months (rather than becoming current) is 18.8%, down from 22.4% last quarter … and likewise for the other two categories.  These percentages reflect a three month moving average of the migration patterns and are, of course, heavily dependent on FICO scores.

While current credit trends look favorable, this could change.  As mentioned in last week’s blog, we are in a period of extreme volatility. While financial models are quite good at capturing the behavioral dynamics of mortgagors, they do work only in a fairly narrow band of reality.  The current economic chaos makes it quite possible that we will move outside of that band.  We would be happy to provide you with a tailored delinquency migration forecast on your portfolio under a variety of potential economic scenarios.

If you'd like a custom delinquency forecast for your portfolio, we’ve got you covered:

Why guess when you can know.