Lenders slow to raise home loan standards
If you thought rising defaults on sub-prime mortgages led to tighter lending standards, think again.
The sub-prime loans backing mortgage bonds created early this year are going bad even faster than those issued in early 2006, a year that set a record for delinquencies on such loans, according to two new studies.
One of the studies, by Michael Youngblood, director of fixed-income research at FBR Investment Management in Arlington, Va., found no evidence that standards had tightened for sub-prime mortgages in this year’s bonds, despite a sharp rise in defaults that began late last year.
“It really is astonishing,” Youngblood said. “It’s as if the lessons of the past two years were ignored in early 2007.”
It was only two months ago that Countrywide Financial Corp., the nation’s No. 1 mortgage lender, drastically tightened its standards for sub-prime loans, Youngblood said.
A study released Thursday by Moody’s Investors Service found that 2006 had eclipsed 2000 as the worst year ever for serious delinquencies in sub-prime loans backing securities.
And for bonds issued this year, 6.6% of the sub-prime loans backing them were seriously delinquent -- at least 60 days past due or in foreclosure -- four months after they were securitized. The comparable rate for 2006 was 4.2%.
Although lending standards may not have changed, the interest rates that lenders charged sub-prime borrowers -- those with bad credit scores, heavy debt loads or little equity in their homes -- did change.
The average rate for all sub-prime loans backing bonds issued in the first half of this year was 10.5%, up from 8.5% for loans in 2006 bonds and a sharp contrast to the rates in the neighborhood of 6.5% that were available on the traditional prime loans purchased by government-sponsored mortgage-finance giants Freddie Mac and Fannie Mae.
The studies by Youngblood and Moody’s analyzed loans in pools that had been securitized, so they do not include loans made in the last few months. Some of the loans analyzed, although securitized in 2007, were made in late 2006, before the near-collapse of the entire sub-prime lending business.
Many investors in mortgage bonds became spooked by the rising defaults and stopped buying securities backed by sub-prime loans last summer. In August, about $9 billion in sub-prime mortgage securities were issued, compared with $42 billion in August 2006.
It wasn’t until this August, however, that Calabasas-based Countrywide refused to make most of the high-risk mortgages that had fueled the housing boom in 2005 and 2006, Youngblood said. And it was only after Countrywide’s move that most of its competitors followed suit because all but the biggest of them follow the acknowledged leader, Youngblood said. Countrywide has made 10.8% of all sub-prime mortgages securitized this year, up from 7.3% last year, he said.
“If you’re Wells Fargo or Chase or the Bank of America, you can make your own weather,” Youngblood said. “But everyone else is in the wind behind Countrywide.”
The typical credit score on securitized sub-prime loans this year was 628, down slightly from 631 in both 2006 and 2005, Youngblood said, describing the drop as not statistically significant.
The percentage of sub-prime loans with credit scores of 580 or lower rose to 21% on this year’s loans from 18.6% in 2006 and 19.8% in 2005, he found.
The average debt-to-income ratio -- the percentage of a borrower’s income devoted to debt payments -- also showed an insignificant change in this year’s pools from the two prior years, Youngblood said.
Moody’s also examined risk characteristics, arguing that the best predictor of whether someone would keep paying a sub-prime mortgage was not a credit score or debt level but the amount of equity the borrower had in the house.
That factor is considered to be best measured by the combined amount of all mortgages on the house expressed as a percentage of the home’s value -- the so-called combined loan-to-value ratio. That ratio was 82% in this year’s crop of securitized loans, down slightly from about 83% last year and the year before.