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Delinquency seems rather easily defined – a borrower either makes the scheduled payment or does not. Since mortgages typically have monthly payments, a borrower who misses one payment would be 30 days late; a borrower who misses two payments would be 60 days late, etc. Thus, “delinquency status” is a count of the number of payments currently missing.
However, it turns out that there are two standards for reporting delinquency status. The first is known as the OTS/FFIEC rule.1 Essentially, a loan increases its delinquency status if a monthly payment is not received by the loan’s due date in the following month. The second standard is known as the Mortgage Bankers Association (MBA) method.2 In this calculation, a loan increases its delinquency status if a monthly payment is not received by the end of the day immediately preceding the loan’s next due date.
Consider the following example of a current loan with a payment due on April 1. With no payment received by April 30, the loan would be 1 month (30 days) delinquent as of the May reporting cycle under the MBA method, whereas the OTS/FFIEC method still would show the loan as current. With no payment received by May 31, the loan would be 2 months (60 days) delinquent as of the June reporting cycle under the MBA method, and 1-month (30 days) delinquent under the OTS/FFIEC method. In short, a borrower that misses one payment is current under the OTS method and 1-month delinquent under the MBA method.
This measurement distinction is important because the MBA calculation is the standard in the “prime” mortgage markets, while the OTS calculation is the standard used in “non-prime” (subprime, Alt-A, home equity, etc.) markets. The implication for modeling mortgage risk is that “delinquency status” is not directly comparable for prime and non-prime loans. Therefore, to accurately forecast mortgage behavior, we must segment our models into at least these two groups.3d.
1 See the Thrift Financial Report (TFR) Instruction Manual, “Schedule PD – Consolidated Past Due and Nonaccrual” (June 2003), http://www.ots.treas.gov; and the FFIEC Call Report Instructions, Schedule RC-N, http://www.ffiec.gov.
2 The MBA method is a convenient name adopted by the primary mortgage market for a standard practice in use long before the OTS/FFIEC standard came into being.
3 A forthcoming article in The Pipeline will discuss the issue of “model segmentation” in more detail, as well as discuss various mortgage market taxonomies (i.e., “prime”, “Alt-A”, “home equity”, etc.).
