Don't Forget the 3/33 Rule.

First, the good news: the overall delinquency rate on home loans stood at 4.44% at the end of the third quarter last year, 10 basis points lower than a year earlier. The bad news is that the delinquency rate was up 10 basis points from the second quarter.

To be sure, delinquency and default rates remain modest by historical standards, and nobody is predicting that they are going to shoot through the roof unless the economy takes an unexpected nosedive.

That said, it's still prudent to remember that managing delinquent and defaulted loans is a lot more expensive than managing performing, current loans. The old rule of thumb was that 3% of a portfolio that was delinquent accounted for one-third of servicing costs.

For the most part, the prognosis for loan performance is good. A growing economy has helped fuel a resurgence in job creation, a bellwether for future mortgage performance. But there are some dark clouds as well on the horizon.

The huge pool of loans originated in 2003 and later is starting to season toward its peak period of default risk.

Moreover, lenders are originating an increasing number of interest-only and payment-option loan products. Despite a ...