Mortgages are like wines, they have vintages. Deciding which mortgage is most at risk of default largely consists of looking at its age, because default rates rise steadily over the first four years, before tapering off.
Over the past six months, however, higher default rates have been creeping up on US mortgage lenders and on the holders of the mortgage-backed securities (MBSs) they issue. A study published in March by the New Jersey-based Mortgage Research Group (MRG) provides the bleakest evidence yet that a credit squeeze is under way.
Mortgages issued in 1994 and 1995 are showing higher rates of default than anyone had previously suspected. "The trend was so pronounced," says Gordon Monsen, president of MRG and a former head of mortgage research at Bear Stearns, "that 1994 originated loans, which were 17 months into seasoning, were defaulting at rates comparable to 1992 loans with more than 40 months of seasoning."
Western states are suffering the most. Mortgage default rates in California have climbed to 0.6% as cash-strapped consumers, caught by the negative equity on their homes, are assuming more debt than they can afford to service.
Rising credit card bills provide early-warning signals to holders of MBSs.