Mortgage Defaults and Foreclosures: Recent Trends and Associated Economic and Market Developments

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Mortgage Defaults and Foreclosures Recent Trends
and Associated Economic and Market Developments

• Randy Fasnacht
• U.S. Government Accountability Office
• Financial Markets and Community Investment
• fasnachtr_at_gao.gov
• Presentation at the
• National Community Development Association
• 2008 Winter Conference
• January 23, 2008

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Objectives

• Analyze the scope and magnitude of recent trends
  in home mortgage defaults and foreclosures, and
  how these trends compare with historical values.
• Evaluate developments in economic conditions and
  the primary and secondary mortgage markets
  associated with recent default and foreclosure
  trends.

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Default and Foreclosure Trends
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Default and Foreclosure Trends
Note The MBA data do not separately identify
Alt-A loans but include them in the prime and
subprime categories.
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Default and Foreclosure Trends

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Default and Foreclosure Trends
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Default and Foreclosure Trends
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Developments Associated with Recent Trends

• A combination of economic and market developments
  contributed to recent default and foreclosure
  trends, including
• the rapid decrease in home price appreciation
  throughout much of the nation beginning in 2005
  and weak labor market conditions in certain
  states
• aggressive lending practices that reduced the
  likelihood that some borrowers would be able to
  meet their mortgage obligations and
• growth in the private mortgage-backed securities
  market, which provided liquidity to support these
  lending practices.
• Other developments may have played a role, but
  additional information would be needed to fully
  assess their impact.

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Developments Associated with Recent
TrendsDecline in House Price Appreciation
Note The HPI ratio is the ratio of (1) the
projected OFHEO house price index for purchase
transactions, assuming average Q3 2003 Q1 2006
appreciation continued through Q2 2007 to (2) the
actual OFHEO house price index as of Q2 2007.
The figure covers the 25 states with the highest
HPI ratio.
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Developments Associated with Recent TrendsEasing
of Underwriting Standards and Wider Use of
Certain Loan Features
Note Loan characteristics are for mortgages
originated in the year indicated and pooled into
private label securities. The CLTV figure
reflects purchase loans only, while the piggyback
loan figure reflects both purchase and refinance
loans. The percentages in the figure on
piggyback loans represent the dollar amount of
first-lien mortgages with an associated piggyback
loan. In dollar terms, jumbo, Alt-A, and
subprime mortgages represented about 19, 16, and
24 percent of mortgage originations in 2006
(excluding home equity loans), respectively.
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Developments Associated with Recent TrendsEasing
of Underwriting Standards and Wider Use of
Certain Loan Features
Note Percentages represent the dollar amount of
purchase and refinance mortgages originated in
the year indicated and pooled into private label
securities that have certain characteristics. In
dollar terms, jumbo, Alt-A, and subprime
mortgages represented about 19, 16, and 24
percent of mortgage originations in 2006
(excluding home equity loans), respectively.
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Developments Associated with Recent TrendsEasing
of Underwriting Standards and Wider Use of
Certain Loan Features
Note Percentages represent the dollar amount of
purchase and refinance mortgages originated in
the year indicated and pooled into private label
securities that have certain characteristics. In
dollar terms, jumbo, Alt-A, and subprime
mortgages represented about 19, 16, and 24
percent of mortgage originations in 2006
(excluding home equity loans), respectively.
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Developments Associated with Recent TrendsGrowth
in Private Label RMBS Market
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Developments Associated with Recent TrendsGrowth
in Private Label RMBS Market

• Role of investment banks and credit rating
  agencies
• Surprised by the speed and severity of declines
  in house price appreciation and underestimated
  the risks of certain loan features such as low
  documentation and high LTV ratios.
• Credit rating agencies have made changes to their
  ratings methodologies to reflect
  worse-than-expected loan performance.
• Rating downgrades introduced uncertainty about
  the credit quality of subprime RMBS and other
  structured products, contributing to credit
  crunch.

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Developments Associated with Recent TrendsOther
Possible Factors

• Misaligned incentives and lack of accountability
  in the origination and distribution of mortgages
• Financial incentives to increase loan volume,
  potentially at the expense of loan quality.
• Some originators lacked sufficient capital to
  make good on representations and warranties.
• Federal regulation of non-bank lenders
• Of the top 25 originators of subprime and Alt-A
  loans in 2006, 21 were nonbank lenders.
• Mortgage fraud
• No and low documentation loans presented
  opportunities to misrepresent income and assets