Defaults on Amortizing ARMs Outpace 'Exotic' Problems
Early payment delinquency data compiled by McDash Analytics here show that the percentage of adjustable-rate mortgages that are going delinquent within the first six months of origination has risen sharply during the past 21 months, but don't blame the growing volume of "exotic" loan products for the problem.
In fact, early delinquencies on amortizing ARMs have risen much more sharply than on interest-only ARMs. And IO ARM delinquency rates are well below those of non-IO ARMs.
McDash executives Steve Berg and Ted Jadlos say a number of factors may be contributing to the trend of higher early missed payments on non-IO ARMs, noting that the average weighted FICO score on IO loans was about 40 points higher than on non-IO loans. They also note that since the study only looked at the first six months of seasoning, the IO borrows have not yet seen resets to reflect fully amortizing payments.
Moreover, they note that the deterioration in ARM performance - especially the non-IO component - has been occurring at a level of constant FICO score and LTV, suggesting that other aspects of underwriting may be getting tweaked to approve unsteady borrowers. The sheer number of early payment delinquency is in some cases stunning, especially since the economy is not in recession.
Among non-IO ARMs with FICO scores below 620, 12.4% of loans less than six months old were delinquent as of September, or about one in every eight borrowers. Among IO ARMs whose borrowers scored below 620 on FICO, the delinquency rate was 8.18%. Both figures have increased rapidly over the past year, despite a relatively strong economy. "My gut feeling is that if we go into a recession, all of these numbers double," Mr. Jadlos told NMN.
Mr. Berg said the difference in early delinquencies between IO and non-IO borrowers may reflect differences in the types of borrowers getting these loans. In part because of regulatory scrutiny of the IO product, lenders appear to be limiting these loans to higher credit quality borrowers than the non-IO ARMS. In fact, McDash's data show that the average weighted FICO score on non-IO ARMs was 692, compared with 736 for IO borrowers.
"It's kind of an adverse selection that I believe is happening on the non-IO loans," Mr. Berg said.
Snapshot: Early Payment Delinquency Rates
(For Loans Less than Six Months Old)
Date IO ARMS Non-IO ARMs
Jan. '05 0.61% 1.13%
July '05 0.64% 1.40%
Jan. '06 1.00% 2.38%
June '06 0.96% 4.36%
Sept. '06 1.21% 4.54%
Source: McDash Analytics (c) 2006 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com