The Delinquency-Chargeoff Disconnect

In suggesting that investors "avoid all" mortgage-related public companies today, Zacks Equity Research analysts pointed to the correlation between mortgage delinquencies and chargeoffs as the reason.

The delinquency rate is going up much faster than foreclosures are being started. With unemployment high and rising, it is hard to see a lot of those delinquencies getting cured. Either the lenders will have to let people live indefinitely in their houses without paying (unlikely that the banks would be so generous) or we will see another huge wave of foreclosures coming.

But just how closely do delinquencies correlate to chargeoffs, especially now that loan modifications are as common as cockroaches in a landfill? Barclays Capital has done some research that shows credit card chargeoffs lag delinquencies by roughly four months. The Office of the Comptroller of the Currency has published research that shows mortgage chargeoffs lag six to 12 months, but that was before the loan-modification explosion. I couldn't find more recent research on this correlation, but Barclays sees some fluctuations in the relationship between credit card chargeoffs and delinquencies. Maybe changes are afoot in mortgages, too?

Does that change the thesis surrounding big players in mortgages, like Bank of America, the mortgage insurers like MGIC, Fannie Mae and Freddie Mac? At the least it's a question worth asking.

Tags: barclays, chargeoffs, credit-cards, credit-quality, delinquencies, mortgage, occ

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