More Homeowners Paying Their Mortgages on Time

More Americans are paying their mortgages on time than at any point in nearly two decades, according to the Mortgage Bankers Association.

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Delinquency rates are a key economic measure, closely watched by economists. The last time a large number of homeowners stopped making mortgage payments on time, from 2007 to 2008, it impacted the entire economy.

Borrowers who have conventional mortgages are the most likely to pay on time, while borrowers with loans backed by the Federal Housing Administration tend to pay late nearly three times more often. (Still, 91 percent of FHA borrowers pay on time.) FHA borrowers tend to have lower credit scores, higher debt-to-income ratios, and lower down payments. All three factors multiply the risk that borrowers will pay late, according to the MBA. But the FHA delinquency rate of 8.65 percent is still a big improvement over a decade ago, when it was about 14 percent.

Why are more Americans paying their mortgages on time? For one, more homeowners now have greater equity in their homes. They’ve paid down the mortgage while price inflation has increased their home values. Homeowner equity in the U.S. stands at $1.5 trillion, the highest on record, according to the Federal Reserve.

Also, stricter federal underwriting rules since 2010 have limited who can get a mortgage. Fannie Mae and Freddie Mac require borrowers to have an average FICO credit score near 750, which is much higher than they required before the financial crisis. However, “if the lending industry begins to relax underwriting standards in any significant way to dig deeper into the pool of riskier credit applicants to plump up their volume of home-purchase mortgages, it’s inevitable that delinquencies will rise,” writes Ken Harney, a syndicated real estate columnist for The Washington Post.

Some lenders have already started to loosen their standards. The average credit score of a mortgage borrower is on the decline, notes a study by FICO. Also, Fannie Mae has eased its policy on debt-to-income ratios and is allowing more applicants with ratios up to 50 percent to get approved for a mortgage. (Previously, the mortgage giant required 45 percent or less.) The FHA also has posted a decrease in average credit scores and is now approving debt-to-income ratios well above 50 percent.