Are Delinquency Rates An Indication Of A Recession Or A Recovery?

One of the most telling sectors that analysts and economists can look to when trying

to determine forecasts for the economy is how the housing market is performing. Since the housing market is so closely linked with the personal welfare of the countrys population, it can provide a snapshot view of how things are performing.

There are a number of factors that could be looked at within the housing market to be utilized as indicators, such as house costs and the number of new houses that are constructed. One of the more telling figures however is that of how many home loans are in delinquency. Delinquency is basically when a person has fallen behind on their loan repayments and might be seen as a precursor to foreclosure. Clearly an increased number of foreclosures are an indication that the finances of individuals aren't healthy and would suggest that all isn't well. Foreclosures themselves have a negative effect on the housing market by decreasing the value of homes and the value of the other houses around them.

So, do high delinquency rates indicate recession? Well it surely is not a good sign. Typically, when an individual falls behind on their mortgage repayments they do so because they cannot afford to make the payments. More often than not this would suggest that they have recently lost an income through losing a job.

High delinquencies may even indicate the lenders haven't been acting responsibly in offering their loans and have been providing loans to people who are considered a high risk. In fact it was for this very reason that the recent economic crisis came about because loans that were provided to high risk people, called subprime loans, left the lenders so exposed to toxic loans that when these loans started turning bad, the whole market began to disintegrate. Not only did high delinquency rates indicate a recession in this instance, but in fact they caused one.

It's not always the case that a country must panic should delinquency rates become high, however, as it doesnt always portray a completely accurate picture. Typically, when a lender sees that a mortgage is turning bad and the debtor is not able to satisfy their commitments, they move in fairly quickly with the foreclosure procedure so as to cut their losses. Though foreclosure is clearly not a good thing, it does remove a delinquency from the records.

So what if the delinquencies are high since they have not been wiped out by foreclosures? Well, it is considered that currently many of the loans that are delinquent haven't been foreclosed yet since the bank is looking for alternatives like a short sale. Although with a short sale the bank is agreeing to take a hit, it is still preferable to a foreclosure. If this is the case then it might just mean that the figures are a bit exaggerated and it's just a case of the delinquencies not being processed yet, meaning that they are still in the system while normally they would have been removed.

So, although delinquency rates are quite a clear indicator of whether or not a nation is looking at recession or recovery, at times it is essential to look deeper into the statistics before drawing a conclusion.

by: Cory Boatright

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