What Are 60-Plus Delinquencies?

The 60-plus delinquency rate is a metric that is typically used for the housing industry to measure the number of mortgage loans that are more than 60 days past due on their monthly payments. A 60-plus delinquency rate is often expressed as a percentage of a group of loans that have been underwritten within a specified time period, such as one year.

Understanding 60-Plus Delinquencies

The 60-plus delinquency metric can also be used for auto loans and credit cards. The 60-plus delinquency rate is helpful because it shows creditors and lenders whether consumers are falling behind on their payments and if they’re likely to default on their loans.

The 60-plus rate may be split into prime loans and subprime loans. Subprime loans are for borrowers with a poor credit history. The 60-plus delinquency rate on subprime loans is typically higher than for prime loans. Oftentimes, 60-plus rates are published separately for fixed-rate loans versus adjustable-rate loans, which have a variable rate and might have the option to reset to a fixed rate later in the term.

Monitoring the 60-day rates, as well as other delinquency rates for borrowers, can provide enormous insight into the financial health of consumers in an economy. If economic conditions are favorable, meaning steady economic growth, then delinquency rates tend to fall.

Conversely, as economic conditions deteriorate, unemployment tends to rise as consumers are laid off from their jobs. With less income, it becomes more difficult for consumers to make their mortgage payments, leading to a spike in delinquencies throughout the economy. 

Also, banks and mortgage lenders track delinquency rates since any interruption in mortgage payments represents a reduction in revenue. If delinquencies persist in a poorly performing economy, bank losses can rise as fewer mortgage payments are received, which leads to fewer new loans being issued. Fewer loans being issued to consumers and businesses can exacerbate the already-poor conditions within an economy, making a recovery more challenging.

60-Plus Delinquencies vs. Foreclosure

The 60-plus delinquency rate is often added to another negative event measure: the foreclosure rate for the same group of loans. The two metrics provide a cumulative measure of the individual mortgages that are either not being paid or being paid behind schedule.

Since 60-plus delinquencies are less than 90 days, the loans have yet to enter the foreclosure process. Foreclosure is the legal process in which a bank seizes a home due to default or nonpayment of the mortgage payments by the borrower. Although each lender may differ, typically 90 to 120 days past due, a home loan enters the pre-foreclosure process.

When a borrower is 90 days past due, the lender usually files a notice of default, which is a public notice submitted to the local court stating that the borrower’s mortgage loan is in default. Borrowers can still try to work with their bank to modify the loan at this point in the process.

If the loan payments are still not made beyond the 90- to 120-day period, then the foreclosure process moves forward. The bank will eventually seize the home, and an auction will be held to sell the home to another buyer.

Mortgage-Backed Securities (MBS)

Mortgage loans are sometimes grouped into a pool of loans that make up mortgage-backed securities (MBS). An MBS is sold to investors as a fund in which they earn interest from the mortgage loans. Unfortunately, investors often have no idea whether the loans that comprise the MBS are current—meaning that the borrowers are not behind on their payments.

If the delinquency rate on past-due mortgages rises beyond a certain level, then the mortgage-backed security may experience a shortfall of cash, leading to difficulty making the interest payments to investors. As a result, a re-pricing of the loan assets can occur, resulting in some investors losing a portion or most of their invested capital.

Special Considerations

Homeowners are usually at risk of losing their homes in an economic downturn. But certain protections were put in place to help homeowners affected by the COVID-19 pandemic. In 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which included a provision that allowed borrowers to skip their mortgage payments for up to a year—a process called forbearance. It also provided a moratorium on evictions.

The moratorium on foreclosures and evictions for enterprise-backed mortgages, including those backed by the U.S. Department of Agriculture (USDA) and the Federal Housing Administration (FHA), has been extended several times. The forbearance expires on Sept. 30, 2021.

The U.S. Centers for Disease Control and Prevention (CDC) announced a temporary halt on evictions in counties with substantial or high levels of community transmission of COVID-19. The mandate was set to expire on Oct. 3, 2021, but a U.S. Supreme Court ruling ended this protection on Aug. 26, 2021, by striking down the moratorium.

Below are some of the steps and key portions of your rights under the forbearance program that borrowers can opt into if they’re delinquent on their mortgage payments.

Call Your Lender

Borrowers must contact their lender or bank that issued the mortgage loan and request forbearance. Borrowers mustn’t stop their mortgage payments until they are approved for forbearance from the lender.

You Still Owe the Payments

If approved, forbearance will cause any of your skipped payments to be added to the end of the loan’s term, meaning that the length of the loan will increase. In other words, borrowers still need to make those payments, but instead of making the payments in the next few months, those payments will be added to the end of the payment schedule for the mortgage.

No Penalties

The good news is that there are no penalties for delaying the payments as a result of forbearance. Also, the missed payments won’t hurt your credit score, which is a numeric representation of your creditworthiness and ability to pay back your debt.

Qualifications

Not all mortgage loans qualify. The program typically limits approval to mortgages that are backed or funded by government-sponsored enterprises (GSEs), such as Fannie Mae or Freddie Mac. As a result, it’s important to contact your lender to see what type of mortgage you have. As mentioned above, the emergency measures signed during the COVID-19 pandemic affect mortgages backed by agencies such as the USDA and the FHA.

Example of 60-day Mortgage Delinquencies

The Mortgage Bankers Association (MBA) tracks mortgage delinquency rates for the U.S. economy. The mortgage delinquency rate peaked at 8.22% in the second quarter (Q2) of 2020 but fell to 6.38% within three quarters as of the first quarter (Q1) of 2021. This was the sharpest decline ever seen in such a short period of time. For Q1 2021, the earliest stage delinquencies—the 30-day and 60-day delinquencies combined—dropped to the lowest levels since the inception of the survey in 1979.

FHA-backed mortgage loans had the highest delinquency rate in Q1 2021 of all loan types, at 14.67%. The report notes that while many areas saw improvement from their mid-pandemic highs, delinquency rates as a whole are still higher than they were pre-pandemic.

What Is a 12B-1 Plan?

A 12B-1 plan is a plan structured by mutual fund companies for the distribution of funds through intermediaries. 12B-1 plans provide mapping for the partnerships between distributors and intermediaries who help to ensure the sale of a fund. Sales commission schedules and 12B-1 distribution expenses are the primary components driving a 12B-1 plan.

Understanding the 12B-1 Plan

12B-1 plans facilitate the partnerships between distributors and intermediaries offering mutual fund shares. 12B-1 plans are primarily focused on open-end mutual funds, which have multiple class structures for sales charges and distribution expenses. Mutual fund companies consider two types of 12B-1 charges in their 12B-1 plans, sales commissions, and 12B-1 expenses.

Sales Commissions

Sales commission schedules are structured to provide compensation to intermediaries for transacting mutual funds. These partnerships can help to increase demand for funds by being marketed from a full-service broker-dealer who facilitates the transaction for a sales load fee. These fees are paid to the broker and are not associated with annual fund operating expenses.

Sales loads are structured to vary across share classes. Share classes can include front-end, back-end, and level-load sales charges. These sales charges are associated with individual retail share classes which typically include Class A, B, and C shares.

12B-1 Expenses

12B-1 expenses paid from the mutual fund to distributors and intermediaries are also a key part of a 12B-1 plan. To market and distribute open-end mutual fund shares, mutual fund companies work with distributors to get their funds listed with discount brokerages and financial advisor platforms. Distributors help fund companies partner with the full-service brokers that transact their funds at the agreed-upon sales load schedule.

Mutual fund companies will pay 12B-1 fees from a mutual fund to compensate distributors. In some cases, funds may also be structured with a low-level load that is paid to financial advisors annually during the course of an investor’s holding period.

Financial industry legislation typically restricts 12B-1 fees to 1% of the current value of the investment on an annual basis, but fees generally fall somewhere between 0.25% and 1%. In most cases, fund companies will have higher 12B-1 fees on share classes paying a lower sales charge, and lower 12B-1 fees on share classes with higher sales charges. This helps to balance out the compensation paid to intermediary brokers while also providing for payment to distribution partners.

Disclosure

Mutual fund companies are required to provide full disclosure on their sales load schedules and 12B-1 annual fund expenses in the fund’s prospectus. The prospectus is one aspect of documentation required for the mutual fund’s registration and is also the key offering document providing information on the fund for investors. 12B-1 plans and any changes to their expense structuring must be approved by the fund’s board of directors and amended in its prospectus filed with the Securities and Exchange Commission.

What Is the Accounting Cycle?

The accounting cycle is a collective process of identifying, analyzing, and recording the accounting events of a company. It is a standard 8-step process that begins when a transaction occurs and ends with its inclusion in the financial statements.

The key steps in the eight-step accounting cycle include recording journal entries, posting to the general ledger, calculating trial balances, making adjusting entries, and creating financial statements.

How the Accounting Cycle Works 

The accounting cycle is a methodical set of rules to ensure the accuracy and conformity of financial statements. Computerized accounting systems and the uniform process of the accounting cycle have helped to reduce mathematical errors. Today, most software fully automates the accounting cycle, which results in less human effort and errors associated with manual processing.

Steps of the Accounting Cycle

There are eight steps to the accounting cycle.

1. Identify Transactions: An organization begins its accounting cycle with the identification of those transactions that comprise a bookkeeping event. This could be a sale, refund, payment to a vendor, and so on.
2. Record Transactions in a Journal: Next come recording of transactions using journal entries. The entries are based on the receipt of an invoice, recognition of a sale, or completion of other economic events.
3. Posting: Once a transaction is recorded as a journal entry, it should post to an account in the general ledger. The general ledger provides a breakdown of all accounting activities by account.
4. Unadjusted Trial Balance: After the company posts journal entries to individual general ledger accounts, an unadjusted trial balance is prepared. The trial balance ensures that total debits equal the total credits in the financial records.
5. Worksheet: Analyzing a worksheet and identifying adjusting entries make up the fifth step in the cycle. A worksheet is created and used to ensure that debits and credits are equal. If there are discrepancies then adjustments will need to be made.
6. Adjusting Journal Entries: At the end of the period, adjusting entries are made. These are the result of corrections made on the worksheet and the results from the passage of time. For example, an adjusting entry may accrue interest revenue that has been earned based on the passage of time.
7. Financial Statements: Upon the posting of adjusting entries, a company prepares an adjusted trial balance followed by the actual formalized financial statements.
8. Closing the Books: An entity finalizes temporary accounts, revenues, and expenses, at the end of the period using closing entries. These closing entries include transferring net income into retained earnings. Finally, a company prepares the post-closing trial balance to ensure debits and credits match and the cycle can begin anew.

Timing of the Accounting Cycle

The accounting cycle is started and completed within an accounting period, the time in which financial statements are prepared. Accounting periods vary and depend on different factors; however, the most common type of accounting period is the annual period. During the accounting cycle, many transactions occur and are recorded.

At the end of the year, financial statements are generally prepared, which are often required by regulation. Public entities are required to submit financial statements by certain dates. All public companies that do business in the U.S. are required to file registration statements, periodic reports, and other forms to the U.S. Securities and Exchange Commission. Therefore, their accounting cycle revolves around reporting requirement dates.

The Accounting Cycle Vs. Budget Cycle

The accounting cycle is different than the budget cycle. The accounting cycle focuses on historical events and ensures incurred financial transactions are reported correctly. Alternatively, the budget cycle relates to future operating performance and planning for future transactions. The accounting cycle assists in producing information for external users, while the budget cycle is mainly used for internal management purposes.

What Are Accounting Policies?

Accounting policies are the specific procedures implemented by a company’s management team that are used to prepare its financial statements. These include any accounting methods, measurement systems, and procedures for presenting disclosures. Accounting policies differ from accounting principles in that the principles are the accounting rules, and the policies are a company’s way of adhering to those rules.

How Accounting Policies Are Used

Accounting policies are a set of standards that govern how a company prepares its financial statements. These policies are used to deal specifically with complicated accounting practices such as depreciation methods, recognition of goodwill, preparation of research and development (R&D) costs, inventory valuation, and the consolidation of financial accounts. These policies may differ from company to company, but all accounting policies are required to conform to generally accepted accounting principles (GAAP) and/or international financial reporting standards (IFRS).

Accounting principles can be thought of as a framework in which a company is expected to operate. However, the framework is somewhat flexible, and a company’s management team can choose specific accounting policies that are advantageous to the financial reporting of the company. Because accounting principles are lenient at times, the specific policies of a company are very important.

Looking into a company’s accounting policies can signal whether management is conservative or aggressive when reporting earnings. This should be taken into account by investors when reviewing earnings reports to assess the quality of earnings. Also, external auditors who are hired to review a company’s financial statements should review the company’s policies to ensure they conform to GAAP.

Example of an Accounting Policy

Accounting policies can be used to legally manipulate earnings. For example, companies are allowed to value inventory using the average cost, first in first out (FIFO), or last in first out (LIFO) methods of accounting. Under the average cost method, when a company sells a product, the weighted average cost of all inventory produced or acquired in the accounting period is used to determine the cost of goods sold (COGS). Under the FIFO inventory cost method, when a company sells a product, the cost of the inventory produced or acquired first is considered to be sold. Under the LIFO method, when a product is sold, the cost of the inventory produced last is considered to be sold.

In periods of rising inventory prices, a company can use these accounting policies to increase or decrease its earnings. For example, a company in the manufacturing industry buys inventory at $10 per unit for the first half of the month and $12 per unit for the second half of the month. The company ends up purchasing a total of 10 units at $10 and 10 units at $12 and sells a total of 15 units for the entire month. 

If the company uses FIFO, its cost of goods sold is: (10 x $10) + (5 x $12) = $160. If it uses average cost, its cost of goods sold is: (15 x $11) = $165. If it uses LIFO, its cost of goods sold is: (10 x $12) + (5 x $10) = $170. It is therefore advantageous to use the FIFO method in periods of rising prices in order to minimize the cost of goods sold and increase earnings.

The Bottom Line

Accounting policies are different from accounting principles, which are the accounting rules to which all accounting policies must conform. A company’s management team can choose specific accounting policies that are advantageous to the firm’s financial reporting. The team might use either conservative or aggressive accounting policies, which will determine how a company’s financial performance appears in a given year.