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Friday, October 12, 2007

More Subprime Mortgage Data

by Tanta on 10/12/2007 11:14:00 AM

Courtesy of Thomas Zimmerman of UBS, whose PowerPoint presentation is available here. There's quite a bit of interesting data for the nerds.

These charts are mini-vintages (quarterly rather than annual) of 2/28 subprime ARMs.

The first shows serious delinquency (60 or more days delinquent, FC, or REO) for first lien purchase money loans using 100% financing (CLTV greater than or equal to 100%) with less than full documentation in states with "stable" HPA. (I don't know exactly what universe of states that is.)

The second chart shows the same loan type for California properties only:

To put this into some context, the third chart shows what we might call the more "traditional" subprime loan: a 2/28 ARM cash out, with full doc and CLTV less than or equal to 80%. This third chart is California properties only.

I think I've said this before, but it bears repeating: I have never, in my hundreds* of years in this business, worked with any mortgage model--pricing, credit analysis, due diligence sampling--that did not consider cash-out an additional risk factor. That is, historically speaking, cash-out refinances always performed worse than purchase money or rate/term refinances, and the models therefore would give a worse risk-weighting to a pool with a majority of cash-outs than a purchase-heavy pool. There were two main reasons for this: cash-out does correlate with heavy debt use (obviously), and also, historically speaking, cash-out refi appraisals were the least reliable, most subject to "hit the number" pressures. This was true even when lenders allowed substantially lower LTVs on cash-outs than recently has been the case.

In my view, a whole lot of the failure of the rating models to adequately account for the risk of these recent pools is that they used "historical" assumptions about the risk of purchase transactions.

*Mortgage years are like dog years, only worse.