2007 MORTGAGE DEFAULT SURPASSES 2006 FIGURES BY A WIDE MARGIN!
RATE OF DEFAULT NEARLY TRIPLES FOR 2007-ISSUED MORTGAGES - FDIC DATA, APRIL 30, 2008!
Recent data, prepared by the Federal Deposit Insurance Corporation (FDIC) for the Wall Street Journal kernalizes the mortgage meltdown we have experienced since early last year. The data shows 0.91% of prime mortgages issued during calendar year 2007 were either in foreclosure or 90 days or more past due as of the end of April, 2008. For the comparable period in 2006 - only 0.33% were as delinquent - a 275% increase in defaults.
Evidence that loose lending standards were leading to higher mortgage delinquencies first emerged in late 2006. The first major casualty of the sub-prime credit crisis, the implosion of New Century Financial, occurred during the First Quarter, 2007. Yet FDIC data suggests lenders didn't substantially tighten standards until at least July or August of last year, when many financial stocks began to tumble.
The analysis was based on mortgage data provided by LoanPerformance, a unit of FirstAmerican CoreLogic Inc. LoanPerformance says it tracks more than 95% of mortgages that were bundled into securities by financial institutions, not including those backed by government-sponsored mortgage giants Fannie Mae and Freddie Mac.
Mortgages from other sources showed the same disturbing trend. On Wednesday, Freddie Mac reported that 1.38% of its loans originated in 2007 were over 90 days delinquent after 18 months from funding, versus 0.38% for a comparable period in 2006. Most Freddie Mac loans are made to borrowers with good credit.
"Foreclosures will remain at record highs, the financial system will be under severe stress and the broader economy will sputter, until these loans pass their way through the process" said Mark Zandi, Chief Economist of Moody's Economy.com. On the brighter side, however, Zandi says loans originated in the Fourth Quarter, 2007 and early 2008 appear to be performing better than those issued earlier last year.
Economists say several factors may account for the dismal performance of the class of 2007. Home prices were falling sharply in much of the country by 2007, and many borrowers who took out loans in that year for nearly the full price of the home now owe more than the home is worth. These borrowers have difficulty selling or refinancing if they lose their job.
Potentially unethical business practices may have played a role in the credit slide as well. Some of the loans issued last year "were knowingly originated as really bad loans," says Chris Mayer, Professor of Real Estate at Columbia University. Mortgage originators who made a lot of money the boom in the housing market "realized the game was completely over" and pushed mortgages out the door, contends Mayer.
Late last year, as loan requirements began to strengthen, some loan originators and home borrowers actually inflated credit scores and appraised values, according to Jay Brinkmann, Vice President of Research and Economics for the Mortgage Bankers Association.
Washington Mutual mortgage loans to sub-prime borrowers showed a 27.2% 30-day-late rate of loans originated in 2007, compared to 24.3% of similar sub-prime loans issued in 2006. National City estimate 65% of its 2007-issued sub-prime loans will end up in default, versus 45% of those issued the previous year.
Lenders did take a few steps early on to cut their losses, however. The Federal Reserve Board's quarterly survey of bank loan officers indicates that lenders began to tighten underwriting standards in late 2006. And loan volume declined 18.5% last year, according to the trade publication Inside Mortgage Finance.
Hindsight suggests that lenders didn't act quickly enough, however. The average credit score of borrowers who took out Alt-A adjustable-rate mortgages edged upwards in 2007, according to UBS, but the portion of such borrowers who fully documented their income and assets dipped. Alt-A is a class between prime and sub-prime.
The share of borrowers with prime jumbo loans who took out a "piggyback" second mortgage - which allowed borrowers to finance more than 80% of their home's value without private mortgage insurance - climbed to a record 33% in 2007, according to the UBS analysis. In this scenario, home buyers were over-extending themselves, to buy a bigger house than they could afford.
"The more conservative lenders were scaling back in 2007, but the more aggressive lenders were expanding," says Frederick Cannon, of Keefe, Bruyette & Woods.
The sharpest pullback in lending began during the second half of 2007, when outside investor demand for mortgage-backed securities fell sharply. Wells Fargo & Co. reduced the maximum amount borrowers could finance in the Fourth Quarter, 2007 and again early this year, according to a recent analyst presentation. J.P. Morgan Chase, meanwhile, tightened lending standards twice by August, 2007, but was still issuing higher-risk no-documentation loans - which has since been curtailed by most lenders.
For more details, read Ruth Simon's article in today's Wall Street Journal.
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