Katrina Default Rates on B&C Loans May Have Peaked

Default rates in areas of Louisiana and Mississippi hit by Hurricanes Katrina and Rita appear to have crested in December, according to a Friedman Billings Ramsay report on the performance of non-agency mortgage loans.

The FBR monthly report on loans that are not securitized by Fannie Mae and Freddie Mac shows that defaults (90 days or more past due) have declined in January and February in the 12 metropolitan statistical areas (including Beaumont, Texas) that were hit hardest by the hurricanes last fall.

"We now know the declines in January from the prior month were a turning point in the credit performance of non-agency loans in the 12 MSAs," said FBR managing director Michael Youngblood.

The default rate on prime loans fell to 9.6% in February from 10.5% in January, while defaults on alt-A loans declined to 17.6% from 19.8% and defaults on subprime loans declined to 27.6% from 29.3%

The FBR researcher attributes the declines to payments on federal flood insurance and private hazard insurance claims. In mid-March, the Federal Emergency Management Agency said it had paid out nearly 90% of all flood insurance claims totaling $11.3 billion related to Hurricanes Katrina and Rita.

"As more homeowners receive federal and private insurance payments, default rates on non-agency loans should recede," he said.

Homeowners also are benefiting from federal disaster relief and the availability of Small Business Administration loans. If insurance payments don't cover repairs, SBA offers real property loans of up to $200,000 and personal property loans of up to $40,000.

Separately, Freddie Mac announced an extension through Aug. 31 of mortgage payment relief for homeowners in the Gulf Coast states most affected by the hurricanes.

Meanwhile, many mortgage servicers and lenders that signed up to participate in the Mississippi housing assistance program are having second thoughts. There is a lot of "hand-wringing" going on, according to mortgage banking attorney Larry Platt.

The state's Katrina Recovery Homeowner Grant Program will provide grants of up to $150,000 to help homeowners rebuild and repair their homes.

However, it is unclear that mortgages will be made current when the homeowners receive the grants and there is no assurance the grants will be used for repairs, Mr. Platt pointed out.

As MSN went to press, lender groups have been pressing the Department of Housing and Urban Development and the Mississippi Development Authority to impose some type of requirement that the funds are used for repairs or paying off the mortgage.

One industry source said Mississippi is leaning toward the idea of giving lenders a claim on the grants if the recipient doesn't use the money for repairs.

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