Brad Ellis said:
Randolph,
Actually I do not have that data. You see, all these guys are going only a few years back. What I want to see is how the current (or even anticipated) forclosure rate compares with more normal market- not those within a hot market nationally.
Anytime a hot market cools you see these dramatic drops or upticks just like you see wild projections of long term gains when a market is coming off its lows.
Brad, I have been doing some research on sub prime mortgages. For sub prime mortgages known as "piggyback mortgage" (typically 80% first mortgage with a 20% second mortgage), the default rate is much higher than any other sub prime mortgage products. Selling a sub prime second mortgage often is discounted 50% or more so lenders tend to hold these. Lenders will sell the the sub prime first mortgage of the piggyback to the likes of Fannie Mae, Freddie Mac, or private bond issuers. At any rate, loans that are sold into the secondary market usually end up in giant pools of mortgages that are converted into bonds for institutional investors.
Wall Street ratings agencies tell investors how risky the underlying mortgages in a pool are (how likely they are to default and cut off the investor's income stream), IE - S & P, Fitch, Dominion, etc.
Recently S & P conducted an extensive analysis of nearly 640,000 piggyback first-lien mortgages contained in bond pools. Many of the mortgages helped fund home purchases in California, Washington DC, New York and other high-cost areas between 2002-2004. S & P's findings amounted to a big dose of bad news for fans of piggybacks: First-lien mortgages connected with piggybacks are far more likely to go into default than stand-alone first mortgages of comparable size.
According to S & P credit analyst Kyle Beauchamp, first mortgages that were originated as piggybacks are 43 percent more likely to go into default than standard first mortgages. Piggybacks made to borrowers with FICO credit scores below 660 are 50 percent more likely to go into default than stand-alone first mortgages made to borrowers with identical credit scores.
The reason for the higher default according to the study is because the borrower does not have anything to loose. And these loans are more sensitive to changes in employment and interest rates.
According LoanPerformance, 80.2% of all mortgages originated in 2005 were ARM. Of the ARM mortgages, 74.9% are 2-year ARMs. That really does indicate that 2007 is going to be a problem year for mortgage default with home prices flat to declining.
One of the statistics that Roger is pointing to are the short sales that do not show up in the foreclosure statistics. Short sales are precipitated by default or seriously delinquent mortgage payments. There are more short sales in my market than foreclosure REO sales by 8 to 1. I have looked at many of the loans of these distressed sales and they are piggyback loans, mostly 100% financing.
For the vast majority of loans, the taking of property is not profitable for the lender. As a result, lenders make substantial efforts to delay or even forgo foreclosure and find alternative and less costly outcomes. These alternative outcomes are especially enticing to lenders in the sub prime market, where losses on foreclosures tend to be higher (Capozza and Thomson, 2005) and the time spent being in delinquency tends to be longer (Capozza and Thomson, 2006). In addition, since sub prime loans have relatively high interest rates, any ongoing payments made by a borrower, even if sporadic, may be able to generate more income for the lender than eviction of the owner and lender ownership of the property.
However, a substantial fraction of sub prime loans do enter foreclosure proceedings. For example, the Mortgage Bankers Association of America reports that over 9 percent of outstanding sub prime loans were in foreclosure at some point during the 2000-2001 time period (recession?). That percentage is over 12 percent today and rising (no recession).