We did a double take when a presenter at a recent conference declared that the mortgage default rate is 6.5 percent. We had just declared in our monthly Chartbook that the rate is 12.2 percent. Neither of us had our numbers wrong—but how?
“Default” has multiple meanings and measures different things, so it’s important to carefully read the small print to know what any purported default number represents. Understanding default rates is critical to our ability to understand mortgage market health, so it’s important to clear up the confusion. Therefore, we offer three questions you need to ask about any default number.
1. Which definition of default are you using?
Each mortgage loan has specific payment terms, usually a requirement that a certain amount be paid on a certain date each month. Borrowers are also usually granted a grace period (15 days is common) before a lender starts charging interest on a late payment. A loan is delinquent if a payment is between 30 and 90 days late (as measured from the original payment date). Once a payment is later than that, the concept of default begins, and confusion sets in.
Several terms are used during this period, all of which are sometimes also called a default: