Another great chart from LPS today addressing the default rates on different types of mortgage products over the first four months of each year going back to 2006.
The chart looks at eight different different types of mortgage products:
- FHA
- Agency Prime (conforming loans sold on the secondary market)
- Non-Agency Prime (conforming loans retained by the originating lender)- Non-Agency Jumbo Prime (high dollar loans held by originating lender)
- Option ARMs
- Subprime
- Alt-A (mostly "stated income")
- Other
In every case, there has been a clear and fairly dramatic decline in defaults, with the exception of FHA, which is only slightly improved (click on the chart to see a larger image). However, the underlyng trend is easy to see. The number of mortgage defaults is on the decline, and will continue to decline as the economy recovers.
While there will be fewer overall defaults, though, it will be very interesting to watch the type of loans which default going forward.
As I have stated repeatedly on this blog, the first wave of foreclosures was caused by poor lending practices, and it hit the lower end of the market in a disproportionately hard way. Today's defaults are trending towards larger loans and bigger houses. There will be fewer overall defaults, because there are far more "bread and butter" houses than executive-level homes in the overall housing supply, but the value losses will now come from the higher end of the market, as will the foreclosures.
So what does this chart mean? It seems to show that conditions in the largest sector of the housing market (the entry level) are improving, and with builders not adding inventory and far fewer foreclosures coming on the market, we could actually find ourselves looking at a housing shortage within the next two to three years.
