2007 Subprime Mortgages Fail Faster

According to a report from Moody’s US subprime mortgages written during the first half of the year are going delinquent at the fastest rate this decade. The average rate of “serious loan delinquencies” in the 2007 bonds is higher than those created last year, a vintage considered to be one of the worst-performing ever. The ratings agency defines “serious delinquency” as loans that are 60 days or more overdue, and includes properties in foreclosure and those already foreclosed upon.

Almost 6 per cent of subprime mortgages written in the first half of this year and subsequently used to back bonds went into delinquency within three months of securitisation, Moody’s data showed. Fewer than 4 per cent of subprime mortgages originated last year went into delinquency within the first three months of being securitised.

Before anyone starts a panic over the information, generally 20% of total mortgages are subprime. 6 percent of 20 percent calculates to .012 percent of the total mortgages generated during the reporting period in 2007. The balance of the mortgage loans 98.8 percent will require a wait to see what their actual default rate may be.

There are several reasons why a mortgage would default so soon after their origination. Poor communications by the mortgage servicer, investors caught by the mortgage squeeze, resetting teaser ARM rates, or fraud. Reports of record foreclosures began emerging in the first quarter of 2007 and by the third quarter all creative mortgage loan options evaporated when no investors would buy the product.

I remember reading the legal notices in the paper years ago and asking my father “How could a mortgage go into foreclosure within three months of the origination?” His reply “Someone sold their house to the bank”. It is not a new occurrence. With today’s technology it should be straightforward to identify the problem. Mortgage fraud is being exposed and prosecuted. More disappointing are the stories where the borrowers made payments that were not correctly recorded due to the succession of mortgage servicers and marketing of mortgages with usurious terms of teaser rates and ARM mortgages.