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How Toxic are the Worst of the Mortgages?

Posted by: Chris Palmeri on April 22, 2009

MDA DataQuick’s John Karevoll gave me a little background on some of the firm’s recent research on loan defaults. Karevoll said he wanted to find out just how toxic the truly toxic mortgages are. He went out and found the worse performing loans of any three month period during the boom. What he found surprised him.

In the worst three month period for loans defaulting—those made from August to November of 2006—some 9% of the loans are now in trouble. While that’s bad, Karevoll says it’s nothing like the 50% default rates some people are talking about. “Those loans may get worse, maybe 10% will default,” he says. “But even in the worst period, when the absolute nastiest loans were made, most of the loans are still good.”

Here are some more of his results: Of the 3.7 million home loans made in 2004, less than 1 percent have since resulted in a lender filing a default notice. Of the 3.7 million loans originated in 2005, 4.9 percent have triggered a default notice so far. Of the 3 million in 2006, 8.5 percent have so far resulted in default. The most toxic period was August through November 2006 which had more than a 9 percent default rate. Of the 2.1 million loans made in 2007, it’s 4.6 percent.

And who were the worst offenders? The lending institutions with the highest default rates for loans originated in August to November 2006 include ResMAE Mortgage (69.9 percent of loans resulting in a default notice), Master Financial (64.6 percent) and Ownit Mortgage Solutions (63.6 percent). Of the major lenders, IndyMac has a default rate on those loans of 18.9 percent, World Savings 8.0 percent, Countrywide 7.7 percent, Washington Mutual 6.3 percent and Wells Fargo 3.4 percent. Less than 1 percent of the home loans originated in late 2006 by Citibank and Bank of America have since gone into default.

Many, if not most, of the loans made in 2006 are owned and/or serviced by lending institutions other than those that made the loans (mortgages are often sold off after the initial lender originates the loan, and are often serviced by a different entity). Many of the originating lending institutions no longer exist.

Reader Comments


April 27, 2009 8:43 PM

Thats all good. What is not being stated here is that the loans were themselves diced into multiple categories of mortgage securities ranging from the good ones to really risky ones. The good ones were probably sold off a while ago to investors and they continue to earn steady returns for them. Its the bad ones that are left on the books of these banks. Even if BoFA and Citibank didn't issue these bad loans, they got stuck with them thru the books of the Investment banks they were forced to buy...


June 21, 2009 4:20 AM

Default Rates for SFR loan portfolios are still increasing, with 4 major banks above 10%. Check out the default rates for the top 25 largest banks here:

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BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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