The Housing Chronicles Blog: 2007 mortgages even worse than those made in 2006

Wednesday, August 6, 2008

2007 mortgages even worse than those made in 2006

In a sign that the housing bust still has a long ways to go before the excesses are wrung out of the system, an analysis prepared by the FDIC for the Wall Street Journal reports that delinquencies are even worse for loans made in 2007 versus those in 2006. From a WSJ story:

Mortgages issued in the first part of 2007 are going bad at a pace that far outstrips the 2006 vintage, suggesting that the blow to the financial system from U.S. housing woes will be deeper than many people earlier estimated.

An analysis prepared for The Wall Street Journal by the Federal Deposit Insurance Corp. shows that 0.91% of prime mortgages from 2007 were seriously delinquent after 12 months, meaning they were in foreclosure or at least 90 days past due. The equivalent figure for 2006 prime mortgages was just 0.33% after 12 months. The data reflect delinquencies as of April 30...

Until these bad loans are fully digested, "foreclosures will remain at record highs, the financial system will be under severe stress and the broader economy will sputter," said Mark Zandi, chief economist of Moody's One piece of good news, he said, is that loans originated in the fourth quarter of 2007 and early 2008 appear to be performing better.

Economists and industry officials say several factors may account for the dismal performance of the class of 2007. Home prices were falling sharply in much of the country by 2007, meaning many borrowers who took out loans in that year for nearly the full price of the home now owe more than the home is worth. These borrowers are particularly vulnerable to a weakening economy, and have difficulty selling or refinancing if they lose their job.

Questionable business practices may have played a role, too. Some of the 2007 loans "were knowingly originated as really bad loans," says Chris Mayer, a professor of real estate at Columbia University's business school. Mortgage originators who profited handsomely from the housing boom "realized the game was completely over" and pushed mortgages out the door, says Mr. Mayer...

Some 65% of subprime loans originated in 2007 will end up in default compared with about 45% of those originated in 2006, according to estimates by UBS AG, which looked at loans packaged into securities...

The share of borrowers with prime jumbo loans who took out a "piggyback" second mortgage -- which allowed borrowers to finance more than 80% of their home's value without private mortgage insurance -- climbed to a record 33% in 2007, according to the UBS analysis. In other words, many people buying expensive homes were putting little of their own money down.

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