MORTGAGES, MARKETS AND WHAT WE KNOW SO FAR Detroit Chapter of the Institute of Internal Auditors. Robert Van Order University of Michigan. Basic Observation: Big increase in foreclosures. Why?. Subprime ARM Defaults are Very Different from Prime and Subprime FRM. – Recession.
Robert Van Order
University of Michigan
Loans 90 days or more delinquent or in foreclosure (percent of number)
FHA & VA
Source: Mortgage Bankers Association
(Quarterly data not seasonally adjusted;1998Q1-2007Q3)
2002 2003 2004 2005 2006 2007Cumulative REO Rates Are Showing Poor Performance of Recent Origination VintagesCould it have been ARMs?
Cumulative REO Rate as a Share of Number of Loans Originated
Age of Loan in Number of Months From Origination Date
Source: Loan Performance, a subsidiary of First American Real Estate Solutions
Note: the last twelve points on each origination year cohort contain fewer loans progressively as loans issued at earlier dates always age faster. Data through December 2008.
– Recession might have thought.Single-family Construction
1- to 4-Family Housing Starts (thousands of units, SAAR)
Third Quarter 2005 record: 1.8 million units
Fourth Quarter 2007:
0.9 million units
Sources: Bureau of Census, Freddie Mac
United States -2.2%
(3rd Quarter Annualized Growth)
West North Central
> 5% Quarterly Change
East South Central
0 – 5% Quarterly Change
South Atlantic -2.7%
< 0% Quarterly Change
West South Central
< -5% Quarterly Change
Source: Freddie Mac Purchase-Only Conventional Mortgage Home Price Index (Annualized Quarterly Rates for 3rd Quarter 2007)
Credit risk is more important than for Agency securities. The risk has been handled (poorly) by structuring.
So securitization could have been a big part of the problem, because it is so susceptible of moral hazard/asymmetric information.
Recall that to some extent the recent subprime loans didn’t look that bad on paper. Hard vs. soft information.