Monetary Policy & Inflation | US
The Mortgage Bankers Association (MBA) Q2 delinquency spike likely overstates the extent of delinquencies and suggests that the administration debt forbearance policy is protecting households’ ability to spend.
A Spike In delinquencies?
Chart 1 NY Fed and MBA delinquency data usually track closely
The MBA Q2 spike in mortgage delinquency rate has received widespread media attention. Yet it is inconsistent with the New York Fed Q2 data on household debt showing a decline in delinquency (Chart 1). The difference in the two numbers likely reflects the following:
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The Mortgage Bankers Association (MBA) Q2 delinquency spike likely overstates the extent of delinquencies and suggests that the administration debt forbearance policy is protecting households’ ability to spend.
A Spike in Delinquencies?
The MBA Q2 spike in mortgage delinquency rate has received widespread media attention. Yet it is inconsistent with the New York Fed Q2 data on household debt showing a decline in delinquency (Chart 1). The difference in the two numbers likely reflects the following:
- A difference in measurement. The MBA uses a broad definition of delinquency: ‘any loan payment not made according to the original terms of the loans’. By contrast, the NY Fed survey is based on Equifax data and counts as delinquent loans reported as more than 90 days in arrears.
- The MBA data does not reflect the impact of the debt forbearance mandated by the CARES Act, while the NY Fed data does.
- Once benchmarked to the pre-GFC low, the NY Fed and the MBA series track closely except for Q2 2020.
Actual Delinquencies Between MBA and NY Fed Estimates, But Closer to the Latter
Because of government regulatory forbearance, the NY Fed delinquency data likely understates actual delinquency. At the same time, the MBA number seems a gross overestimate:
- Mortgages represent about 20% of banks’ loan books and 70% of household debt. If financial distress was as pervasive as the MBA data suggests, retail sales would not be back to the pre-pandemic level, the real estate market would not be as strong as it is, and the recovery would be much weaker than it has been.
- Second, the MBA delinquency number is inconsistent with its own, historically low, Q2 foreclosures number (Chart 2). Of course, the latter reflects government mandated evictions stays, pandemic-related court closures and other factors, but it still seems very low.
Discrepancy Between New York Fed and MBA Data Shows Forbearance Is Working
The discrepancy between NY Fed and MBA suggests that the administration’s policy of protecting household creditworthiness from the impact of the pandemic is working. As economic normalization continues, households’ ability to service their debts will improve and delinquencies will come down. Households will be able to exit the pandemic with limited damage to their credit ratings and capacity to spend.
Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed , the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)