A report released yesterday by Moody's Investors Service found that early defaults on the 2007 mortgage vintage are worse than what was seen one year ago, pointing to extended problems for the mortgage market. HW readers already know about this -- I'd first noted apparent trouble in the 2007 mortgage vintage way back in late August. Per the Financial Times, which picked up coverage of the report:
"The early performance clearly shows that the 2007 vintage is worse than last year's," said David Teicher, co-head of the Moody's residential mortgage-backed securities group. "What the ultimate performance will be remains to be seen." Almost 6 per cent of subprime mortgages written in the first half of this year and subsequently used to back bonds went into delinquency within three months of securitisation, Moody's data showed. In contrast, fewer than 4 per cent of subprime mortgages originated last year went into delinquency with­in the first three months of being securitised.
Teicher is clearly hoping against hope that early trending of the 2007 vintage is somehow different than every other vintage originated in years past -- put simply, a high volume of early default activity doesn't lead to strong performance as a vintage is seasoned. Most default activity in a given pool peaks roughly two years after origination, which somewhat ominously suggests we're going to see continued problems in 2009. (And I haven't mentioned the volume of option ARMs facing recapitalization in early 2009 just yet.) Update: Freidman Billings Ramsey looks today as if they're also channelling HW, releasing a report that challenges the idea that lenders became more strict in underwriting during the first half of 2007. National Mortgage News reports:
"We find scant evidence that the risk characteristics of subprime loans originated in 2007 differ significantly from those of subprime loans originated in 2006 and 2005. Therefore, we cannot conclude that lenders have reversed" their liberal underwriting criteria, FBR managing director Michael Youngblood said. The default rate on adjustable-rate subprime MBS issued in 2007 jumped 44% in August, rising from 2.80% in July to 4.04%. This is higher than the average 3.05% default rate for subprime MBS issued in previous years at the same age. "We note that the leading mortgage banking company in the United States, Countrywide Financial Corp., did not fully revise its underwriting criteria for subprime mortgage loans until August 15, 2007," the FBR report says.
I'd written about the topic, including Countrywide's status, a few weeks back.