Subprime borrowers who took out loans in 2007 are defaulting at twice the rate of 2006 loans ten months after issue, underscoring the reality that resets are likely only one small aspect of a multi-faceted mortgage crisis now being felt nationwide. According to Friedman, Billings Ramsey analyst Michael Youngblood, defaults among the 2007 subprime vintage hit 11.2 percent in November, CNN Money reported Wednesday. That's roughly 300,000 households defaulting without a reset. Housing Wire first reported on problems in the 2007 vintage in August of last year, noting that deliquencies even at that early stage in the cycle indicated problematic performance. From CNN Money:
Defaults are spiking well before resets come into play thanks to the lax lending environment of the past few years. Many borrowers were approved for mortgages that they had little chance of affording, even at the low-interest teaser rates . "I was rather shocked by the characteristics of the 2007 loans," said Youngblood ...
Perhaps he shouldn't have been so surprised. In September, HW reported that lender proclamations of tightened underwriting standards were window dressing at best, after looking at loan program changes made by Countrywide Financial at the time. It's a sentiment that MBA chief economist Doug Duncan gives credence to:
... instead of tightening standards and cutting back on risky loans, lenders kept lending. Why? "Because investors continued to buy the loans," said Doug Duncan, chief economist of the Mortgage Bankers Association ... "As long as you could sell the loan, you made the deal," Duncan said ... "There were very few overt changes in industry underwriting guidelines," said Youngblood. What did change, he said, was that lenders were making more exceptions to their standard practices. ... "These exceptions generally amounted to no more than 5 percent [of subprime loans] before 2006," said Youngblood, "but they represented the majority of these loans issued in 2006 and 2007."
There is, at least, one aspect of the mortgage industry that hasn't changed amidst the current turmoil -- loans are largely still made on the basis of whether or not they can be sold into the secondary market. It's just that the only major buyers left right now are named Fannie and Freddie.