LPS: Mortgage Originations Among Highest Quality Ever in 2010-2011

The Lender Processing Services (LPS) Mortgage Monitor Report for December show
improvement in a number of the metrics it tracks. Many measures of delinquency
rates are down, inventories are clearing in some states, and recent loan
originations are “among the best quality on record.”

The overall delinquency rate did not
change from November, remaining at 8.15 percent but is down 7.7 percent since
December 2010.  Seriously delinquent
loans, those 90 or more days overdue or in foreclosure decreased 0.6 percent to
7.67 percent, a -5.9 percent change from one year earlier.

The foreclosure rate which was 4.16
percent in November fell to 4.11 percent in December and is down 1.0 percent
year-over-year.  Foreclosure starts
showed the most dramatic change.  There
were 159,092 starts in December compared to 165,205 in November, a -3.7 percent
change and starts were 38.7 percent below the level in December 2010.   This is the lowest level of foreclosure starts
since at least 2008.

While 90+ day delinquencies are about
the same in judicial and non-judicial states there remains a large distinction between
these states in other measures of foreclosure activity.  LPS found that half of all loans in
foreclosure in judicial states have not made a payment in more than two years
as the foreclosure process drags on.  The
foreclosure sales rate in non-judicial states is four times that in judicial
states (6.8 percent vs. 1.6 percent). 
Foreclosure inventories stand at about 3.5 percent nationwide; in
non-judicial states those inventories are about 2 percent while in judicial
states they are 2.5 times greater – over 6 percent.  Still, pipeline ratios (the time it would
take to clear through the inventory of loans either seriously delinquent or in
foreclosure at the current rate of foreclosure sales) has declined
significantly from earlier this year in judicial states while remaining flat in
non-judicial states.


Loan
originations
(month ending November 11) numbered 537,720 compared to 597,888 in
October, a decline of 10.1 percent and 29.3 percent below originations one year
earlier.  The loans originated over the
last two years
, however, are among the best quality on record according to
LPS.  2010-11 vintage originations showed
90-day default rates below those of all other years, going back to 2005.
December origination data also shows that recent prepayment activity – a key
indicator of mortgage refinances – has remained strong, with 2008-09
originations, high credit score borrowers and government-backed loans having
benefited the most from recent, historically low interest rates.

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Study: No Additional Restrictions on QRM Needed

The proposed down payment standards
for new mortgages might push 60 percent of potential borrowers into high-cost
loans or out of the housing market altogether according to a paper released
today by the Center for Responsible Lending.  The paper,
Balancing Risk and Access:  Underwriting
Standards for Qualified Residential Mortgages
, is the result of a study to
weigh the effects of proposed underwriting guidelines for qualified residential
mortgages (QRM)
, mortgages that are exempt from the risk retention requirements
laid out in the Dodd-Frank Wall Street Reform Act.

The Center, a nonprofit, nonpartisan
research and policy organization with a stated mission of “protecting
homeownership and family wealth by working to eliminate abusive financial
practices” has, along with other consumer and industry groups, raised concerns
about a potential disproportionate impact of restrictive QRM guidelines on
low-income, low-wealth, minority and other households traditionally underserved
by the mainstream mortgage market.  The
study examines the way different QRM guidelines may affect access to mortgage
credit and loan performance and estimates the additional impacts on defaults
resulting from guidelines above and beyond QM product requirements.

The researchers, Roberto G. Quercia,
University of North Carolina Center for Community Capital, Lei Ding, Wayne
State University, and Carolina Reid, Center for Responsible Lending used
datasets from Lender Processing Services (collected from servicers) and
Blackbox (data from loans in private label securities collected from investor
pools.)  They identified from among 19
million loans originated between 2000 and 2008 the 10.9 million that would meet
the current QRM guidelines, i.e. loans with full documentation that have no
negative amortization, interest only, balloon, or prepayment penalties.  Adjustable rate mortgages must have fixed
terms of at least five years and no loans over 30 years duration. 

The default rate for the universe of
loans was 11 percent, for prime conventional loans, 7.7 percent, and for loans
(regardless of type) that would have met the QM product feature limits, 5.8
percent.  In other words, the research “suggests
that the QM loan term restrictions on their own would curtail the risky lending
that occurred during the subprime boom and lead to substantially lower
foreclosure rates without overly restricting access to credit.”

The next step was to apply some of
the suggested additional criteria for QRM to the loans; a minimum down payment
of 20 percent, a range of higher FICO scores, and lower debt to income (DTI)
ratios.  The goal was to determine the
benefit of each as measured by an improvement in default rates without an undo reduction
in borrowers able to qualify for an affordable loan.

When various permutations of
loan-to-value (LTV), FICO scores, and DTI ratios were applied to the loans lower
default rates were achieved.  These
improvements, however, were accompanied by the exclusion of a larger share of
loans.  As Figure 4 shows, some of the restrictions
resulted in the exclusion of as many as 70 percent of loans.   

To quantify this, the authors
developed two additional measures.  The
first, a benefit ratio, compares the percent reduction in the number of
defaults to the percent reduction in the number of borrowers who would have
access to QRM loans with the proposed guidelines.  For example, an underwriting restriction that
resulted in a 50 percent reduction in foreclosures while excluding only 10
percent of borrowers would have a higher benefit ratio than one with the same
reduction in foreclosures that excluded 20 percent of borrowers.


One finding was that LTVs of 80 or
90 percent resulted in particularly poor outcomes while an LTV of 97 percent
had added benefits of reduced defaults relative to borrower access.  This suggests that even a very modest down payment
may play an important role in protecting against default while excluding a
smaller share of borrowers than would a higher down payment requirement.

Since underwriting is unlikely to
impose restrictions in isolation, the study analyzed a combination of possible
QRM restrictions.  They found that the
strictest guidelines produced the worst outcomes and that none of the patterns
of proposed restrictions performed as well as the QM restrictions on their own.

The second measure, an exclusion
ratio, looks at the number of performing loans a certain threshold would
exclude to prevent one default.  In this
measure, the number of excluded loans can be viewed as a proxy for the number
of “creditworthy” borrowers who would be excluded from the QRM market.

Imposing 80 percent LTV requirements
on the universe of QM loans would exclude 10 loans from the QRM market to
prevent one additional default.  Adding
to this a FICO above 690 and 30 percent DTI ratio would exclude 12 creditworthy
borrowers to prevent one default.

The current QRM criteria are more
restrictive for rate-term and cash-out refinancing than for purchase
loans.  The study found that the QM
product restrictions are the most effective in balancing the demand between reducing
defaults and ensuring access to credit.

The study also found that imposing
additional LTV, DTI, and FICO underwriting requirements
on QM loans had
disproportionate effects on low-income borrowers and borrowers of color.  Just over 75 percent of African-American
borrowers and 70 percent of Latino borrowers would not qualify for a 20 percent
down QRM mortgage and significant racial and ethnic disparities are evident for
FICO requirements as well.  At FICO
scores above 690, 42 percent of African-Americans and 32 percent of Latino
borrowers would be excluded against 22 percent of white and 25 percent of Asian
households.  At the most restrictive
combined thresholds (80 percent LTV, FICO above 690, DTI of 30 percent) approximately
85 percent of creditworthy borrowers would not qualify with African American
and Latino disqualifications each above 90 percent.

The Center says in conclusion that
its research provides “compelling evidence that the QM product loan guidelines
on their own would curtail the risky lending that occurred during the subprime
boom and lead to substantially lower foreclosure rates, while not overly
restricting access to credit.”

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LPS: National Delinquency Rate Jumps 1.1% in May

Lender Processing Services released
preliminary data this morning from its May Mortgage Monitor Report.  The highlight of the report is that the
national delinquency rate jumped 1.1 percent to 7.20 percent in May although it
is still 9.6 percent below the rate one year ago.  Delinquency is defined by LPS as loans that
are 30 or more days past due but not in foreclosure.

The presale inventory – i.e. homes in
the process of foreclosure, was down 0.5 percent from the previous month to
4.12 percent but this an increase of 0.2 percent from one year ago.

In actual numbers, there are 3.54
million mortgages that are past due; 1.58 million of those are 90 days or more
past due but not yet in foreclosure.  The
presale inventory now totals 2.03 million and the total number of distressed
loans – delinquent and in inventory – is 5.57 million.

The states with the highest percentage
of non current loans remain relatively unchanged from previous months.  In order of severity they are Florida,
Mississippi, New Jersey, Nevada, and Illinois.

The Mortgage Monitor report will be
available on or before July 9.

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FHA Loan Problems Mounted in April as Foreclosure Starts Soar 73%

The performance of FHA loans dominates the April Mortgage Monitor report released Thursday by Lender Processing Services (LPS).  While GSE and private loans saw significant drops in foreclosure starts and portfolio loans trended down slightly, foreclosure starts for FHA loans soared, jumping 73 percent in April.  While all 2005+ vintages of FHA loans had increased numbers of starts, the increases for loans originated in 2008 and 2009 were dramatic.

“In 2008, when the loan origination market virtually dried up, the FHA stepped in to fill the void,” explained Herb Blecher, senior vice president for LPS Applied Analytics. “FHA originations tripled that year, and increased to five times historical averages in 2009. High volumes like that, even with low default rates, can produce larger numbers of foreclosure starts. That represents a lot of loans to work through – the 2008 vintage alone represents some $14 billion of unpaid balances in foreclosure, and the overall FHA foreclosure inventory continues to rise.”

Despite the increase in every vintage, loans originated for FHA after 2009 are performing distinctly better.  At the two year mark the delinquency rate for the 2010 vintage is 0.4 percent compared to 1.3 percent for loans originated in 2006 and 1.8 percent for the Class of 2007.

Nationally there were 181,584 foreclosure starts recorded during April compared to 186,446 in March and 187,323 one year earlier.  The national pre-foreclosure sale rate (foreclosure inventory) was 4.14 percent, exactly the same as in March and in April 2011.   There is still a tremendous difference between the inventory in non-judicial states (2.46 percent) and that in judicial states (6.50 percent.)  The inventory for GSE, private, and portfolio loans decreased slightly during the month but those improvements were offset by a sharp jump in the FHA foreclosure inventory driven in turn by the jump in foreclosure starts.     

Foreclosure sales continue to decrease, down 2.6 percent from March.  Sales were down 2.0 percent in non-judicial states while those in judicial states were largely unchanged.  Even those states that saw increases in foreclosure sales saw only incremental increases in terms of real numbers, and all were still far below pre-moratoria levels.

The delinquency rate in April was 7.12 percent, up slightly from 7.09 in March but well below the 7.97 percent rate a year earlier.  The rate of seriously delinquent loans and loans in foreclosure decreased to 7.37 percent from 7.44 percent.  In April 2011 the rate was 7.86 percent.  This decrease masks the fact that the age of the delinquent loan inventory continues to increase.

On the loan origination front, LPS reported that activity was up for the second straight month and was the highest in four months.  Non-FHA originations rose from 27.3 percent of originations in March to 30.2 percent in April and the volume of non-FHA loans with loan-to-value ratios higher than 80 percent increased from 112,000 in March to 128,000 in April.  Both increases were noted by LPS as “signs of HARP.”

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