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Sub-Prime Mortgage loan Delinquency Rates Rise
Loans made to borrowers with less-than-perfect credit -- also called sub-prime loans are being closely monitored by mortgage bond investors as an indication for a change in low mortgage default, low-foreclosure environment that has prevailed for the most of the decade.
Higher loan defaults and delinquencies are of concern to bond investors who could face losses if loans are paid off early due to foreclosures. Sub-prime borrowers are generally thought to be more stretched financially and hence more vulnerable to a slowing housing market or to a sluggish economy than are borrowers with higher fico credit scores.
But even some borrowers with higher fico credit scores than traditional sub-prime borrowers those who qualify for so-called "Alt-A" loans -- are having more difficulty keeping up with payments, noted UBS in a recent report. According to UBS reports, the rate of delinquencies in sub-prime home loans backing mortgage bonds issued in the first quarter of 2006 reached 4.00%, nearly twice as high as the delinquency rate for sub-prime bonds issued in the first quarters of 2004 and 2005 at a similar age.
Novastar Home Mortgage, a sub-prime mortgage lender reported and released its most recent mortgage bond performance report in industry speak. The bond was issued in April had 7,173 loans remaining and had 91 loans in foreclosure and 29 already real-estate owned. Just last year there were 11,498 loans remaining and just 23 loans in foreclosure with 1 loan real estate owned.
According to Kevin Jackson, a senior mortgage strategist with RBC Capital the report "provides evidence that recently originated sub-prime loans are performing much worse" than home loans that were closed in earlier years. For instance, after about six months into 2006, Alt-A option adjustable-rate mortgage loans had close to a 0.5% rate of delinquencies of 60 days or more. At a similar age, 2005 loans had a rate a bit under 0.4%, and 2004 vintage loans had a rate of close to .2%.
For Alt-A interest-only loans with interest-only terms of five years, the 2006 vintage loans had a delinquency rate of slightly over 1.3 % after about six months, while 2005 vintage loans stood at 1.2% and 2004 loans at a similar age stood at 1%.
The increasing incidence of delinquencies and defaults across home mortgage types appears to concur with the peak of the home finance market in late summer 2005. Ever since home sales started slowing, supply of homes for sale started increasing and prices started rising more slowly or even falling in some markets, borrowers have been having a difficult time.
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