Subprime Default Analysis

“This report is, appropriately enough,” the investment bank practically warns in the report’s first paragraph, “entitled Inferno.”

Credit Suisse reveals in the 23-page report that 25 percent of subprime mortgage deals issued last year have hit a delinquency rate of at least 8 percent at the end of 2006.

In the second quarter of 2006, the rate of loans that were six months old and 60 days late was 5.7% — 42 percent higher than the first quarter, 101% higher than 2005 and 180% higher than 2003 and 2004.

And the news isn’t going to get better when the next batch of data is released.

“The performance of the most recent issuance (third quarter of 2006) is also not promising,” Credit Suisse said. “Although we don’t have long performance data for this period, its delinquency and foreclosure (rates) … exceed or match all prior vintages.”

But there is an upside. The market’s weakness prompted originators to tighten their underwriting guidelines. However, the drive to profits could curtail some of the damage control.

“We believe the changes will lead to an improved performance in 2007, although perhaps not enough,” the company said. “Hunger for volume may limit the amount of tightening we see.”

For the most part the report is another telling of the battering the overall subprime industry is taking.

Just last week another subprime wholesaler, Lenders Direct Capital Corp., shut its doors and put 150 people out of work.

In a conference call with investors in late January, Countrywide Financial CEO Angelo Mozilo said up 50 subprime companies are going under everyday.

And Credit Suisse isn’t the only Wall Street firm finding bad news.

During the first week of February, Friedman Billings Ramsey & Co. reported that default rates rose to their highest levels in six years.

In what appears to be a reaction to gloom, the Mortgage Bankers Association recently put a fact sheet showing there is a lot of good news in the industry.

Eleven of the 13 talking points or “FACTS” deal with foreclosures, delinquency rates and the subprime market.

“The number one cause of delinquencies and foreclosures is job related,” reads a line set off in bold type.

“There is no evidence that the increased delinquency and foreclosure rates are the result of hybrid ARMs or nontraditional products, such as interest-only and payment-option mortgages,” the association said. “About one percent of all loans are in the foreclosure process.”

Credit Suisse listed several reasons for the market’s deteriorating performance, including first time buyers with limited credit histories, FICO scores with “limited predictive value” and borrowers who were given loans but were not prepared to handle the responsibility of owning a home.

“We believe many new borrowers were dabblers and therefore not very committed to the property,” the company said. “It’s not surprising that many of these loans are rapidly flying through the delinquency pipeline.

“Do not pass go, do not collect $200.”

Patrick Crowley is a feature journalist and blogger for MortgageDaily.com. He is also a reporter, blogger and columnist for The Cincinnati Enquirer.
e-mail Patrick at: PatCrowley@MortgageDaily.com