RealtyTrac announced today that foreclosures are up markedly. While the number of foreclosure filings, which includes default notices, auction sales notices, and bank repossessions, rose 8% in January compared to the previous month, the new figures represent a 57% increase compared to a year ago.
While the number of subprime mortgages, especially those that were written in 2006 when rational lending guidelines took a hiatus, is a major factor contributing to this increase, another trend that’s emerging is painting a disturbing picture.
A few days ago, Global Economic Analysis (GEA) posted a screen shot from a particular Washington Mutual Alt-A mortgage pool known as WMALT 2007-0C1. The screen breaks down the pool of mortgages into the typical categories, including delinquencies. Here are some of the highlights from the pool:
Weighted Average LTV = 78%
Fico Score = 705
Full Doc Loans = 11%
Geography = 48% California, 15% Florida
The chart breaks down performance by month, starting with July 2007. By most standards, 705 is a respectable credit score, which makes the delinquency numbers all the more surprising. In a period of 7 months, this pool is showing a massive foreclosure rate of 13.17%. Add REOs into the mix and the figure goes to 15%. Even the vintage 2006 subprime pools didn’t default at such a rapid rate.
GEA poses an interesting question as to whether the FICO system has lost its mind or if maybe there’s a larger issue at work. Although it’s hard to imagine borrowers with a 20%+ equity stake (albeit phantom like) and strong credit scores defaulting at a rate that would lead any servicing portfolio manager to jump out of the nearest window, the numbers seem to indicate that borrowers may be walking away when they are 30 or 60 days delinquent, not even waiting for foreclosure. In December 2007, the 90 days delinquent category stood at 3.79%. Even if every one of these delinquencies became a foreclosure, the figure should only double to 7.58% in January. Instead, the foreclosure figure is 13.17%.
A look at the details shows that nearly 93% of the pool was rated AAA yet almost 15% of the entire pool is in foreclosure or REO after 8 months.
What does it all mean? Until recently, I may have been one of the last holdouts on the FICO bandwagon. I’ve seen enough delinquency reports to make me believe in the ability of FICO to accurately predict performance. But something is terribly wrong with this picture. Credit scores north of 700 have not, in my experience, shown such poor performance levels so quickly. While it’s possible that a deterioration in the underwriting guidelines (e.g. reverses after closing) that we saw on the subprime side became part of the fabric in Alt-A lending, it doesn’t explain these numbers, even if most of them were stated income loans. Unless of course, these were mostly No Doc loans, meaning that most of the borrowers didn’t have jobs. It’s hard to imagine just what was going on in the underwriting department.
If there was ever a doubt that the phenomenon recently dubbed as “jingle mail” actually exists, wonder no more. It’s alive and well. Hopefully, it won’t be still be around around come Christmas time. But given the recent trends, that may be wishful thinking.
Note: Richard Bitner is the author of Greed, Fraud and Ignorance: A Subprime Insider’s Look at the Mortgage Collapse. As a 14-year veteran of the mortgage industry, he spent five years as the President of Kellner Mortgage Investments, a subprime mortgage company. In addition, he was a Director for GMAC Residential Funding and the National Training Manager for GE Capital Mortgage Insurance (Genworth Financial).
Fair Issac does not use ANY income data in it’s score calculation. The FICO score will predict a borrower’s willingness to repay but not their ability to repay. Full doc loans by definition mean that income and employment are documented. Look at the pool of WAMU rubbish. 11% is full doc which means 89% is probably stated. Unless they hooked up with a really lazy loan agent, few rational people would do a stated loan if they can document their income. Stated costs more but only a little.
FICO is not the problem. Stated and no doc is the real issue.
FICO is not the problem, but it’s not the answer, either. It’s a meaningless number meant to browbeat the american public into fitting into the securitized asset mold.
it says nothing about creditworthiness, ability to repay or willingness to repay.
period.
Really nice blog entry! Great info, charts, etc. This is really tangible info.
Keep it coming.
Kudos
The weighted average LTV of 78% combined with the high default rate probably says most of those firsts had piggy back seconds. The typical person with a 20% equity cushion should be able to sell so if they are walking away it is because they either have a second or the banks valuation of the pool is way off.
Well, I think there are a couple of things at work here.
First of all, a FICO score does NOT predict the probability that a person will repay the loan, it predicts the likelihood that a person will NOT pay. Two different animals.
Second of all, the reason defaults are so high are related to two things (in my mind):
1) If you owe $600k on a property now worth $350k, the psychology says that you will walk away, even if you have the temporary 24 month ding of a foreclosure on you credit report. Then, 24 months from now you can buy back your place (or its equivalent) for $300k. The thinking goes, why keep paying on an “asset” that is worth half what I paid for it? I’m not saying that it is right, but that is what people are thinking.
2) As alluded to by other folks, if they were stated income loans, we know that at least 60% inflated their income by at least 50%. People just cannot afford the payments. This is an income driven phenomenon. If the median income is $60k, the median house price has to be about $180k, otherwise debt service is almost impossible….
Stated or no doc high ltv loans are and will always be a problem. This program is a magnet for fraud, flipping, straw buyers and inflated appraisals. Risk is mitigated on decreased LTV, 75% has proven to work nicely. Credit scores are a much larger problem than anyone making money off credit scores wants you to know. In the past ten years i have looked at more than 500 credit reports a year. I can’t remember the last report i looked at that did not contain errors, some serious enough to lower an individual credit score by almost 100 points.
On the other side of same coin I have made thousands of home loans to people with 550~580 scores that have never missed a payment. I did this by putting them into a fixed rate, documenting their income, paying off liens that would affect title and not letting them take a loan they could not afford.
It is good that there is dialog about credit scores as well as a consumer’s ability to access free reports annually. The bureaus themselves have been pretty poor stewards of our credit information, it is shameful the amount of information they will sell you for a price. I would like to see a great deal more attention placed on the number of reporting errors, how they got there and how difficult it for a “normal” person to find out and then correct them. In the world of FICO you are definitely guilty until proven innocent.
Beginning Jan 1 of this year on LTV’s greater than 70% a person with a 679 score will pay $750 MORE in loan fees than a person with a 680 score, FNMA/FHLMC $100,000 loan amount. A person with a 619 score will pay $2000 more for the same loan. One of those people will pay more for car and home insurance, credit card interest, car loans. Go to http://www.annualcreditreport.com . Check one of the three bureaus for yourself every four months. If you are married, do your reports seperately. Get help from someone that is familiar with credit reporting and then read the report until you understand every code, rating, abbreviation and comment thoroughly. Knowledge is power. Credit scores are discriminatory, inaccurate and getting worse but they are probably not going away or getting fixed anytime soon. You can save yourself a lot of money by finding out how they work and working on your own.
FICO became an enabling tool for fraud. The examples of a 28 year old “property investor” doing a stated income stated asset loan to purchase a $750,000 property in CA are endless. Anyone sane knows that the population percentage that can actually afford a $500,000+ home is the same as it was in 2002. Very few of these people are under 50. Add to that, the problem is that the actual rate charged on WAMU’s Option ARM ranged from 7.25% to 7.875% with a payment rate of 1.25% that is a neg am spread of 6%+. In the “old days” just 5 years ago, the neg am spread was 3%. Many of these loans were done as 90% 1sts, with a concurrent 10% second. So unless the property continues to increase in value more than 6% per year (40 yr average is 3%-5%), within a year it buyer is upside down, payments and taxes are rising, all on a property EVERYONE knew was unaffordable to start with. The suprise is not that the default rate is pushing 15%, it is that it is not pushing 50%. Stupid lending leads to bad results.
Your rational responses are welcome at PSGute@aol.com
I’d like to make a few comments on the comments. First if this is WAMU’s pool of Option ARM (i.e. “1%”) then it totally makes sense people are defaulting & walking away at a high pace. The actual rate of interest on an Option ARM is close to 10%. The difference between the min payment (or 1% fully amortized) and 10% interest only payment is added back to the balance. Therefore, the original LTVs are likely 5-10% lower if these are CA or FL properties. Furthermore, this chart does not state what period the borrower is in with regards to the option arm schedule. If the borrower has hit 110% or 125% of the original balance and is now obligated to the fully indexed rate, the rapid succession of default makes total sense. One can assume this is the beginning of the next shoe (e.g.g Option ARM fallout)
Secondly WAMU has used research tools to qualify a stated income borrower. Mostly this includes cross referencing the ‘income’ stated on the 1003 (universal residential loan application) to make sure it is reasonable for the job description and the given geographical area. WAMU (and most stated income lenders) would follow with scrutinizing the validation of assets. If the assets didn’t have some resemblance to an borrower making the stated amount, then the loan was a bust. (FYI Asset requirement for WAMU ALT-A is 6 months PITI reserves)
NOW, the documents proving assets & employment (CPA letter acknowledging the filing of schedule Cs, calls to the borrowers employer by the lender for verification, etc) are susceptible to fraud or “tweaking”.
So, it’s not as if, you just walked in a got a loan with simply stating your assets stating your income and all was approved.
Where am I going with this…..sheesh!
Oh yeah, so when you take into account the qualifications for approval including a better than average FICO score (otherwise this pool would be considered Subprime and not ALT-A), a 20% down payment in a higher cost area (note loan amounts exceed conforming limits), and the need for 6 months PITI (principle interest taxes & insurance sitting in the bank after the close of escrow) this article, imo, is indicative of more unpleasant crap to come.
ALT-A is not as bad as it sounds. Many don’t know, but for a few years, A Paper and ALT-A we’re priced the same (i.e. same interest rates). Therefore, if you were a broker or agent wanted to impress your client (borrower) you simply have them bid for an ALT-A loan and spare them the hassle of assembling full doc paperwork.
I hope this made some sense…I lost my train of thought while writing it…(damn kids distracting me!)
EDIT:
I should have added this to the end:
This is indicative of moderately capitalized borrowers are hitting the skids……If this continues, the next step will be the well capitalized borrower.
This isn’t rocket science. I have a 750 credit score and I’m happy paying on my home so long as the value flat lines or rises. When it’s in a free fal why shoud I hold onto this house? Who wants to live in the same place for the next 20 years, not me.
Get out now, you’ll only be more upside down later. If by chance you do want to grow old in your current home (at least in California) it would make more sense in the long run to have it foreclosed, a relative buy it and you rent it from them, until your credit affords you the opportunity to repurchase it. Why should anyone become a slave to a rich bank? That is stupid. They built the Ponzi scheme, and I’m sorry FICO has it’s place - but when the financial institutions and Wall Street jack the values around to create indentured servants for themselves - consumers aren’t really going to care what their FICO scores are. CASG US KING! My money now goes under the matress, you can stick your foreclosure and my FICO score where the sun don’t shine.
The bank can stick it.
My thoughts
Remember when you parents cared about paying their bills?
Then along came I’m OK your OK
Your can be your own individual and who cares about the results
Well we have bred a group of people that just won’t be controlled!
FAR OUT AND POWER TO THE PEOPLE!!!!!!!!!!!
have read many mortgage lender SEC filings, and I think the general custom is to provide LTV adjusted for mortgage insurance. So if you have a 95% LTV loan, but you purchase the required mortgage insurance on 15% of the equity, the LTV goes down on the banks’ books as 80%.
Not to get away from FICO, but the bigger picture is something I predicted about 4 months ago. With the current public/media perception that banks took advantage of the public, foreclosures will continue to escalate at an exponential rate from here on in. In the past, being in foreclosure was embarrassing….not to be talked about. Many times consumers would not even attempt to sell their home even if they had equity in it because they didn’t want their neighbors or any one else to know.
The embarrassment factor has been removed.
Now on top of the usual death, divorce & job loss REO’s, we have compounded the numbers to include failed speculation, a much higher degree of fraudulent loans and ARM’s coming to term. Now add in the higher FICO score home owners who will be saying ‘don’t care…gave it back to the bank…they screwed me so let them get what they deserve’.
And the public, their neighbors and everyone else will agree with them and support their decision.
mIchelle,
you’re dead on……dead on.
I absolutely support people treating this as a pure business decision.
After all, the banks are.
IF and WHEN we see every one of these swaps, “Level 3″ games and other nonsense pulled out where we can see it, and we get HONESTY and CREDIBILITY, then it is reasonable to demand it of borrowers.
Until then, see a lawyer, see what your options are, and make a PURE BUSINESS DECISION on what’s best for YOU.
They’re doing it, and they wrote the paper.
Don’t get all “moral” with me until those who WROTE the loans start acting in a moral fashion.
Great story and great comments below it. Being in Ohio a state that is in economic shambles has anyone considered the default rate for some of the basic reasons people cant pay their mortgage, i.e, loss of job, illness and just the increased cost of living need to be factored into those calculations as well. Great Blog keep up it up Mr. Jackson.
FICO scores can only predict based on what has happened in the past. FICO cannot predict if the person will be unemployed 30 days after closing even if the underwriter saw that the applicant was with a company for 5-10 years and had a good position. Loyality by employees and companies are a thing of the past. FICO scores cannot predict that the values of homes will decrease right after paying top dollar for the property the borrower is in. Underwriters cannot make that judgment call either-it is based on what is happening in the economy-if the economy is humming along and life is good-so will poeple paying on mortgage loans. With 20% equity in a home-I would imagine this group in this pool of loans may have had no other alternatives. When the economy gets the way it is today and for the last 18 months or so-people I know who have had problems have tried to sell but can’t becuase the rest of use are scared of the economy. So it is a catch-22 situation.
Portland, I believe these are 2006 vintage loans. I can’t see any way they reach the 110% trigger. The most extreme circumstances I can devise comes up with about 3 years in for the trigger.
http://www.mortgage-x.com/calculators/pay_option_arm.asp