Residential Mortgage Default Forecasting: How Much Do Price Trends Matter? Part 2
In early December of 2018 we published a discussion on the significant and dominant influence of price trends on mortgage default rates. There we noted that home price changes, analyzed at the zip code level, were a significant driver of default rates and were especially dominant when the loan to value ratios were relatively high. Here, we continue the analysis using the change from the peak to the trough of prices over the period of 2005 through 2018 for a variety of CBSAs. Again, we see a very strong impact on residential mortgage backed securities (RMBS) default rates from average property price declines. For the aggregate of all of the zip codes in all of the CBSAs shown below, we see a correlation between the default rate and peak to trough price decline of -0.74. We show all of these markets in aggregate in Exhibit 1 below with a trend line inserted. Default rates climb significantly when peak to trough prices decline more than -20%. This is consistent with typical loan to value, LTV, ratios and shows why conservative loans will be at 80% LTV or below.
Sklarz, Michael; Miller, Norman; and Pennington-Cross, Anthony, "Residential Mortgage Default Forecasting: How Much Do Price Trends Matter? Part 2" (2019). Finance Faculty Research and Publications. 135.