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How Toxic are the Worst of the Mortgages?

April 22nd, 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.

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