The current state of the mortgage market is promoting owner-occupants to default, according to research released today, in an indication of the growing moral hazard behind government-led homeowner rescue programs. When the analytics firm Equifax looked at the November 2008 vintage of mortgages, it found that owner occupants default at a lower rate than investors or borrowers with second homes. But the vintage studied was in the pre-HAMP era of course, and since then, borrowers are now taking advantage of a new market, one that is especially favorable for owner-occupants, according to Amherst Securities. Non-agency investors trying to navigate through the murky values of mortgage bonds could take note, according to the Equifax report, as owner-occupancy is considered to be a “key determinant” of loan and deal performance. Investors used to rely on such loan-level data, but when mortgage fraud increased during the current housing crisis, the information became unreliable. Equifax analysts evaluated a specific sample of loans that were outstanding in November 2008. The 12-month default rate for loans identified as a principal residence at origination was 4.5%, compared to 6.5% for investment properties and 5.5% for second homes. Analysts found that the trend continued for seasoned loans. According to the report, 18% of loans reported as owner-occupied at origination were no longer labeled as such. Those properties defaulted at a rate of 7%. However, the 66% of those loans were owner-occupied and defaulted at a rate of only 3.7%. To Equifax, the remaining 16% of loans had unclear owner-occupancy status but had a 5.3% default rate.

Investors also need to know what properties are eligible for modification. The US Treasury Department launched the Home Affordable Modification Program (HAMP) in March 2009 to provide incentives to servicers for the modification of loans on the verge of foreclosure. Only owner-occupied mortgages are eligible for the program.

According to the research firm Amherst Securities, HAMP changed the economic environment to a friendlier place for owner-occupants. The Treasury today even launched an initiative to reduce the principal of a loan under the program. The graphs above show owner-occupied borrowers and investors had similar default transition rates until early 2009. But in early 2009 – HAMP launched in March 2009 – behavior for owner-occupied borrowers began to weaken.

“[T]he environment for borrowers who own investor properties has changed much less than for owner-occupied borrowers,” according to the Amherst report. “[T]hey can live in their house rent free during the time it takes to establish if they qualify for a HAMP mod. And if they qualify, they can stay in the program for at least 3 months, even if they do not make a single payment.” Write to Jon Prior.