A key indicator has determined that both mortgage performance and the broader U.S. economic growth slowed in the third quarter.
Fitch Ratings' Fitch Fundamentals Index (FFI) fell from "+2" in the second quarter to "zero," while the mortgage component scale specifically dropped to a "+5" rating from a "+10" last quarter.
The quarterly FFI assesses the U.S. economy on a scale ranging from "+10" to "-10." It measures 10 key indicators, including:
- Credit card and mortgage performance
- Corporate defaults
- High-yield recoveries
- Ratings outlooks
- Transportation trend.
Historically, the FFI has mirrored broader economic performance.
"The FFI shows the fundamental drivers of the U.S. economy treading water right now," explained Fitch Ratings Managing Director Jeremy Carter earlier this month. "If the political stalemate in Washington continues, or even escalates, we would expect to see a weakening of some of the fundamentals at year end."
The impact of mortgage delinquencies
The drop in the FFI is attributable to "a slowdown in the reduction of U.S. prime residential mortgage delinquencies," HousingWire reported. Although the housing market is steadily improving—delinquencies actually fell 12.3 percent year-over-year—the rate climbed by 4.23 percent from August to September, according to Lender Processing Services.
The raw foreclosure numbers remain at 3.3 million properties more than 30 days past due, while there are 1.3 million properties whose lenders are more than 90 days late in their payments.
Florida, Maine, Mississippi, New Jersey and New York continue to lead the nation in borrowers who are not current on their loans.
What does this mean for lenders?
Going forward, another factor in play will be the future of the government's role in the mortgage market. President Obama and other lawmakers have called for the influence of Fannie Mae and Freddie Mac to be reduced and replaced by a new structure.
Compass Point Research & Trading analyst Isaac Botansky told Bloomberg earlier this month that the "conversation [about the government's role in the housing market] is going to shift to whether it's necessary to burn down the whole house just to rebuild it, or whether there's merit in renovating it." Botansky went on to say these philosophical questions will soon give way to questions about how to actually implement a new housing policies.
Contingent upon the outcome of this ongoing debate—particularly if private lenders see an increased role in the mortgage market—borrowers could face higher interest rates and other barriers to credit.
Another key point is that broader economic conditions will often affect the performance of loans, which means lenders need to be even more attuned to risks. With borrowing costs on the rise, homes are becoming less affordable and Americans do not have as much borrowing power as they once did.
Lenders must adopt more stringent standards for assessing creditworthiness, and a loan management software tool can help them to determine risk levels of borrowers. Whether this means assessing the traditional "Five Cs of Credit" of borrowers or creating more customized risk profiles, loan management software will remain a valuable tool.