Commentary: Not Your Garden Variety Foreclosures
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).