MADISON, Wis. (4/14/09)--The Filene Research Institute has released a research brief, Mortgage Borrower Risk Profiles, Delinquencies, and Interest Rates in 2005-2008
, to help assess the three critical issues for both lenders and borrowers. The brief, by Mark C. Meyer, CEO of Filene, and Luis G. Dopico, Macrometrix, provides marketplace analysis of mortgage pricing strategies, a review of delinquency rates across borrower characteristics and demographics from the period's survey data, and concludes with several strategic implications for credit unions. One strategy suggests that credit unions may benefit from studying delinquency rates for mortgages and other loan types using in-house data reflecting their field of membership. For instance, changes in the national unemployment rate may have very different impacts on credit unions servicing federal employees, state employees, private companies, communities or nationwide professional groups affected by each recession in varying degrees. "This type of analysis and data may also be of particular importance when institutions are facing especially large changes in their customer bases--for instance, following a merger, the expansion of a credit union's FOM, or the launch of a new product for a new set of customers," says the report. The report, third in a series of Consumer Finance Research briefs based on information from Ohio State University's Consumer Finance Monthly, explores several research questions:
* What might a simplified mortgage pricing model look like? * How do delinquency rates vary across borrowers' financial characteristics? * How do delinquency rates vary across demographic groups? * Did mortgage pricing based on rising house prices contribute to delinquencies? and * How can both underpriced and overpriced mortgage loans be avoided?
"The ongoing mortgage crisis provides a painful reminder that financial institutions cannot assume that low delinquency rates during economic expansions will continue indefinitely," said Meyer. "As this brief points out, many financial institutions underpriced mortgages in the mid-2000s. The interest rates they charged were not enough to cover eventual loan losses. These mounting losses, and the uncertainty surrounding their eventual size, mean that many financial institutions are now in deep disarray," he said. Meyer noted that the temptation during a housing crisis is to err on the side of extreme safety. Many financial institutions try to avoid underpricing mortgages in the future by charging interest rates that reflect today's delinquency rates, or by rejecting more loan applications altogether. However, credit unions need to approach such measures with caution, and to recognize opportunities to serve members, he said. For more information, use the resource link.