Apr 28 2017, 9:24AM
Here we go again?
Sam Khater, CoreLogic's deputy chief economist, says loan performance is beginning to show some cracks in what has been a near perfect veneer. This might be an early signal of a downturn in the credit cycle. Khater is not issuing a warning, merely alerting those who should be watching such things to pay attention.
He writes, in an article in the CoreLogic Insights blog, that a typical economic expansion and recession are strongly driven by loan performance. When times are good, lenders take on more marginal borrowers then tend to become more conservative when loan performance begins to deteriorate. That often exacerbates an economic downturn.
Loan performance across the four major types of loans (agricultural, business, personal consumption, and real estate) all improved throughout the first five years of the expansion. Then, over the last year, performance of the first three loan types began to slip. Real estate loans bucked the trend, continuing to improve. Now, Khater says, there are small signs that their pristine levels of performance could be deteriorating.
Mortgage performance is typical measured by levels of delinquency and foreclosure but those, Khater says, are both backward looking and lag as indicators. One way to address that is through transition rate analysis. This method controls for time by looking, in the case of his analysis, at loan vintage, i.e. production within a given year, which he says, allows for a much more nuanced view of performance.
By focusing on only those loans produced in the first 10 months of each year in question allowed Khater to include 2016 data in his analysis. His justification for the short and early time frame is that historically the first six to nine months of a loan's performance have a very strong persistence, and loans tend to remain on a similar track years later. He starts his analysis with 2010 as the first full year of the expansion vintages and says underwriting has remained roughly similar since then....MORE