Deutsche Bank Sees Delinquencies Spike with Unemployment

A July securitization report out of Deutsche Bank draws an important link between spiking unemployment, rising delinquencies and plunging home prices. Deutsche researchers note June’s 9.5% unemployment rate is well above the 5.6% level seen a year ago and marks the highest rate since the early 1980s. Much has changed since the ’80s, including the extent of the asset-backed securities (ABS) market. As the ABS market expanded, the report notes, performance of consumer-related ABS and national employment trends became inextricably linked. The report notes that, while mortgage delinquencies and particularly subprime delinequencies began increasing in early 2006 due to factors other than unemployment (loose underwriting standards, fraud, etc.), the deterioration in the labor markets furthered hampered recovery in mortgage credit performance. Deutsche researchers also found an historic inverse relationship between unemployment and house price declines, in that home prices plunge as unemployment spikes, further indicating employment status and asset value is linked. The researchers therefore look for relief in the consumer-related ABS market in terms of employment recovery. One of the employment factors, the number of temporary employees on nonfarm payrolls, continues to decline, indicating companies feel increasing confidence in hiring permanent — rather than temporary — workers, according to the Deutsche researchers. They note the rate of increase in unemployment may soon plateau, while initial claims for jobless benefits have begun to tick down recently. “Jobless claims have been a reliable leading indicator in the past,” the report concludes. “But based on this measure, and assuming the recent decline in jobless claims doesn’t reverse itself, a downturn in the unemployment rate still is likely 6-12 months away.” Write to Diana Golobay.