First-mortgage default rate rises to high not seen since March 2021

The rate at which traditional mortgage accounts went into default rose another notch in May to a high not seen since March 2021.

At 0.36%, the balance-weighted first-mortgage default rate was up from 0.35% in April and 0.28% a year earlier, according to Standard & Poor’s and Experian. The second-lien default rate fell by one basis point to 0.39% from the previous month but was up from 0.36% a year earlier.

Although default rates are generally up compared to a year ago, they remain historically strong. The first-mortgage default rate was far higher just prior to the pandemic at 0.84%, and in the wake of the Great Recession it rose to about 2%.

The recent increase in the first-mortgage default rate is in line with broader trends in consumer finance performance.

The composite default rate also rose a basis point from April to 0.51%. Default rates for auto loans and bank cards each increased by 3 basis points during the same time period. The bank-card default rate in May was 2.49%. The auto loan default rate was 0.61%

Rising default and mortgage rates suggest increased strain on the ability to repay, but signs of near-term loan performance stress were limited in the most recent Mortgage Bankers Association’s survey data on forbearance outcomes between June 1, 2020 and May 31, 2022.

Although nearly one-fifth of borrowers with pandemic-related payment suspensions have exited them without repayment or loss mitigation, the largest category of consumers in that category (almost 30%) have resumed regular payments with deferrals that push missed amounts to the end of the loan. Only 0.85% of borrowers remain in forbearance, the lowest in the survey’s history.

“It is a positive sign to see the overall servicing portfolio performance reach 95.85% current in May — 21 basis points higher than April’s figures,” said Marina Walsh, the MBA’s vice president of analysis, in a press release. 

“However, it is worth watching if the rapid increase in interest rates for all loans, combined with inflation that is outpacing wage growth, complicates post-forbearance workout options and puts additional pressure on borrowers in existing post-forbearance workouts,” she added.