Both subprime and Alt-A borrower delinquencies continued to rise during February, with Alt-A delinquencies rising from 15.94 percent in January to 17.40 percent. According to a report released Thursday by risk management and due diligence provider Clayton Holdings, Inc., subprime delinquences now represent an eye-opening 33.14 percent of loans on a UPB basis, as well.
Delinquencies going up are one thing; but the continued drop in housing prices is having a more ominous effect on many investors, lenders, and insurers, as loss severity creeps upward. Alt-A loss severity, in fact, is now even approaching average severity numbers for subprime across all collateral. Clayton reported that subprime first lien average loss severity increased to 45.80 percent in February, up from 42.56 percent in January; Alt-A first lien average severity rose to 36.66 percent, in contrast.
Loss severity refers to the loss a lender is forced to take during foreclosure, as a percentage of unpaid principal balance.
The swift deterioration in Alt-A mortgages is taking place despite a low level of adjustable-rate Alt-A mortgages actually hitting a reset in the current period. The graph below, from the Clayton report, provides a look at Alt-A reset volume by month — note that very few Alt-A borrowers are staring down a pending reset throughout 2008. Yet they are defaulting in droves anyway.
While non-industry media are incorrectly and inexplicably zeroing in on rate resets as the driver behind the recent spike of Alt-A borrower defaults, most industry experts that have spoken with Housing Wire have suggested that as many as 70 percent of Alt-A loans originated in recent years have been fraudulent.
“It’s fraud [that is] now coming home to roost, higher lending limits or not,” said one source, who asked not to be named. “Rate resets aren’t the problem here, and even if they were, LIBOR is low enough right now that it would ease payment shocks for most borrowers.”
For more information, and to obtain a look at highlights from this month’s report, visit http://www.clayton.com.
“It’s fraud [that is] now coming home to roost…” but who is responsible for the fraud?
Ultimately, the lenders had their hands on the spigot controlling the cash flow. So to suggest it was all the borrowers’ fault is just irresponsible not to mention creepy. Would you want to borrow money from a company that isn’t interested in verifying income? No, because it suggests their standards are too loose. And if their standards are too loose loaning money, just imagine what a nightmare the rest of the organization is.
Aren’t you ignoring the loan payment jumps that are due to the growing loan balance exceeding the threshold (typically 110%-115%) of the original loan amount?
For those paying well below the interest value the loan balance could easily grow at 4-6% per year, converting to fully a fully amortised loan well before the calendar reset date.
Would you want borrow money from a company that isn’t interested in verifying income?
Absolutely not, nor did I — not that my refusal to do so stopped millions of others from imagining what a large bonus check might look like and then claiming it as actual income. Because, you know, it could happen.
Which is my way of saying that you’re absolutely correct. The borrowers had nothing to do with this. It’s entirely those mean, heartless lenders that did this. What was I thinking?
Read this: http://www.housingwire.com/2007/11/28/finding-fraud-fitch-to-overhaul-ratings-process-will-review-originators-and-issuers/
J -
I don’t know if the above covers option ARMs, which is what I think you are referring to with your reference to recapitalization. I’ve seen other charts covering that loan class, so I’m inclined to think this chart does not. But I could be wrong.
Nonetheless, much of what I’m seeing in the press tends to allude to stated-income ARMs, which is primarily what I was trying to get at.
re: “Aren’t you ignoring the loan payment jumps that are due to the growing loan balance exceeding the threshold (typically 110%-115%) of the original loan amount?”
Unless rates take a significant swing upwards, most option ARMs will recast at the statutory 10 year period - not because of hitting the negam cap. So we still have another 5 years until the bulk of those loans hit the recast payment shock. While most (85-90%) option arms have a current UPB above the orignal loan amount, at least based on the forward MTA rates the rate of increase of the negam should be rather slow.
Of course the pessimist in me says that based on the 90+ rates on the option arms we don’t need to worry about payment shock or recasts because most of these loans are going to default long before that every becomes an issue.
[…] Wire recently covered a Clayton report that found Alt-A deliquencies nearing 18 percent in February, despite a the near non-existence of outstanding borrower rate resets. The report also […]
[…] who decided to make the loan because investors were willing to buy it. That’s the real reason Alt-A borrowers are defaulting in droves, too, even in the similar absence of a payment […]